Long-Run Effects of Tax Policies in a Mixed Market

Abstract

The purpose of this paper is to provide a systematic treatment of tax policies in mixed markets with endogenous entry. We consider three types of tax-subsidy policies: a simple unit subsidy, an entry-license tax, and a policy mixture of the two instruments. Under the unit-subsidy policy, in contrast to the results of the short-run analysis with exogenous entry, the optimal subsidy level in a mixed market is not higher than that in a private market, and privatization affects welfare. Under the entry-license-tax policy, the optimal entry-tax level in a mixed market is lower than that in a private market. Finally, we show that the privatization neutrality theorem holds under a two-part tax-subsidy policy: the first-best outcome is achieved in both mixed and private markets, and the optimal tax-subsidy rate is the same across the two regimes.