Uniform, efficient and independent Ramsey taxes across markets

Abstract

In a perfectly competitive market and in multi-product monopoly with linear demands and costs, the socially optimal taxes are Ramsey independent taxes (RIT), which are independent of each other, have a simple structure, reduce all products proportionally, and affect consumers and firms in similar ways. Under imperfect competition, while not optimal in general for both social welfare and consumer surplus objectives, RIT nevertheless retain attractive uniform effects in all markets. In asymmetric Cournot and Bertrand oligopolies, the socially and consumer-efficient taxes are surprisingly complex even in simple settings. Postulating a third objective of taxation as the average of social welfare and consumer surplus restores the optimality of RIT. Finally, another important property is that RIT impose equal corresponding marginal costs across all types of markets, as required for economy-wide efficient taxation.