Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: This paper develops a dynamic model of optimal mixed taxation in a small open economy with two goods markets; one characterized by perfect competition and the other by market power on the production side. The purpose is to examine how the existence of market power affects the optimal structure of income, commodity, and production taxes. We show that a distortion created by monopoly power can either be targeted through a production subsidy or a reduction in the commodity tax. In turn, this means that the policy rules for marginal labor income taxation and marginal capital income taxation take the same forms as under perfect competition. We also show that the results on marginal income taxation carry over to the case of oligopolistic competition if (i) the firms are identical or (ii) their market shares are observable.

Keywords: Income taxation; commodity taxation; redistribution; market power

JEL-codes: D42; H21; H25

Language: English

28 pages, April 2, 2026

Full text files

ues1045.pdf  Full text

Download statistics

• Umeå University, Department of Economics
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to David Skog ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:umnees:1045This page generated on 2026-04-02 07:57:40.