Welfare analysis of uniform entry tax in a general equilibrium model with heterogeneous industries

Abstract

This paper examines whether uniform entry taxes across all industries can improve welfare in a monopolistic competition model with multiple groups of differentiated goods, which vary in parameters including their elasticity of substitution and taste for variety. The results show that even if taste for variety is high and monopoly power is weak in some industries, the uniform tax rate on entries across all industries can improve welfare when the weighted average of taste for variety over all industries is low and when the weighted average of the Lerner index of monopoly power over all industries is high.