Abstract
AbstractThis study examines the optimal taxation in a free‐entry Cournot oligopoly using the average cost function and aggregative games approach when either a specific tax, an ad valorem tax, or both, is imposed. When either a specific or an ad valorem tax is imposed, we obtain the following results. First, the business‐stealing (business‐augmenting) effect in the free‐entry equilibrium makes the optimal tax rate positive (negative). Second, social welfare under the optimal specific tax is lower than that under the optimal ad valorem tax. Third, when both taxes are imposed, marginally increasing a positive ad valorem tax (negative specific tax) improves social welfare when the optimal specific (ad valorem) tax is initially imposed. Finally, the optimal combination of a specific subsidy and ad valorem tax depends on the shape of the average cost function.
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