Optimal Indirect Taxation Under Imperfect Competition

1. Introduction It is commonly suggested in economic textbooks that indirect taxation or market power generates “deadweight loss” or “excess burden” to society, because they distorts the relative prices of commodities. The magnitudes of the welfare losses depend on the slopes of demand and supply (or marginal cost) curves. In order to minimize the aggregate deadweight loss, an optimal indirect tax structure should prescribe higher tax rates for commodities that…