Working Paper

Ad Valorem Taxation in a Multiproduct Monopoly

Anna D'Annunzio, Antonio Russo
CESifo, Munich, 2022

CESifo Working Paper No. 9881

We study the pass-through of ad valorem taxes with a multiproduct monopolist. We characterize two mechanisms whereby an ad valorem tax on one good reduces all prices (Edgeworth’s paradox), depending on the goods being substitutes or complements. We also find that the tax can increase the supply of all goods. Hence, consumer surplus and welfare can increase even when the goods are underprovided compared to the social optimum. We provide several applications where these results hold. Our findings indicate that in a multiproduct setting the effects of unit and ad valorem taxes on market outcomes and welfare are fundamentally different.

CESifo Category
Public Finance
Industrial Organisation
Keywords: commodity taxation, tax incidence, multi-product firms, monopoly
JEL Classification: D420, H210, H220