Comparisons of Ad Valorem and Unit Tax in Two Different Industries

This dissertation analyzes the comparisons between unit and ad valorem tax in two different industries. Chapter 1 considers an industry with one upstream monopolist and a fixed number of asymmetric downstream firms. I compare market outcomes from unit and ad valorem tax under three pricing schemes that the upstream monopolist can use, uniform pricing, third-degree price discrimination, and two-part tariffs. I find that ad valorem tax is always tax revenue preferred to unit tax when both are charged at the same layer as long as profit margin is positive. Downstream ad valorem tax improves total social welfare by relocating production to more efficient downstream firms. Chapter 2 investigates a similar tax comparison between these two taxes in a two-market industry in which one market is generating negative aggregate externalities and being taxed. Firms monopolistically compete in each market by producing different varieties of the same product. Each consumer values both prices and varieties and chooses one market to visit. I show that for a given tax revenue target, unit tax leads to less consumption of the good with negative externalities than ad valorem tax in both the short run and the long run. In the short run, the choice between these two taxes regarding total social welfare depends on the relative magnitudes of distortions from imperfect competition and externalities. In the long run, switching taxes does not affect the distortion from imperfect competition. Unit tax is preferred because it leads to less consumption of the good with negative externalities