A note on tax analysis in a two-region model of monopolistic competition

Abstract

Takatsuka (Pap Reg Sci 93:595–617, 2014) compares the effects of ad valorem and unit taxes on firm location, within the framework of new trade theory. In the model, the unit tax is imposed at the instant of production, but the ad valorem tax is imposed at the instant of consumption. Since a portion of the good “melts away” during transportation, the actual amount of consumption (tax base) decreases from the point of production. This note presents a consistent application of taxation and clarifies how the timing of taxation characterizes the equilibrium location pattern.