When the production or use of a good creates an external cost, an unregulated market produces a socially-inefficient quantity of output. One remedy for this inefficiency is to impose a Pigouvian tax equal to the marginal external damage associated with the good. In many circumstances, privately optimizing agents facing a Pigouvian tax make decisions that are consistent with the maximization of social welfare.

Comparing Specific and Ad Vaslorem Pigouvian Taxes and Output Quotas

Comparing Specific and Ad Valorem Pigouvian Taxes and Output Quotas

In this paper, we investigate the relationship between the demand ad valorem, cost ad valorem and unit taxes in terms of price, quantity and tax revenue. In particular, we prove that the Musgravian transformation holds in the Hotelling model. In addition, we show that the Suits-Musgrave theorem must be revised as output in the Hotelling model remains invariant in the presence of different taxes. That is, for a given price instead of a given output, the tax revenue under demand ad valorem tax exceeds that under the corresponding unit tax as long as profit levels for both stores are positive, a very general assumption. The exception is when the two stores are located close to each other and transportation cost is zero. Only in this case, are tax revenues and price under both tax regimes the same. If both stores are symmetrically located, the superiority of the ad valorem tax holds true except when the two stores are located back to back. Finally the farther away the location of a firm from the end point is, the smaller the difference in tax revenues between demand ad valorem and unit tax will be: the effect of the Suits-Musgrave theorem weakens in the presence of location clustering.

Some Taxation Theorems in the Hotelling Model

x iv CHAPTER 1: IN TR O D U C TIO N ................................................................................................ 1 1.1 Access Pricing Issues..................................................................................................... 1 1.1.1 Access Pricing and Capital Costs............................................................................................................ 2 1.1.2 Access Pricing and Efficiency....................................................................................................................4 1.2 Analysis of Access Pricing in the Thesis......................................................................5 CHAPTER 2: RATE-OF-RETURN REGULATION AND TH E CAPITAL SUBSIDY — AN EQUIVALENCE R E S U LT...................................................................... 7 2.1 An Introduction to Rate-of-Return (ROR) Regulation.................................................. 7 2.1.1 The Importance of Calculating a Fair Rate of Return in Price-Cap Regulation..................................... 8 2.1.2 The Importance of the Fair Rate in Benchmark Regulation.................................................................... 9 2.1.3 The Literature on ROR Regulation.......................................................................................................... 9 2.1.4 The Results and Contributions of the Chapter........................................................................................ 12 2.2 The Unregulated Monopoly.......................................................................................... 14 2.2.1 The Assumptions of the Model...............................................................................................................14 2.2.2 Maximising Profit for the Unregulated Monopoly.................................................................................... 15 2.2.3 Illustrating the Unregulated Monopoly Outcome in the Input-Space Diagram.......................................17 2.3 The Monopoly with an Input Subsidy on Capital....................................................... 20 2.3.1 The Profit-Maximising Monopoly with a Capital Subsidy...................................................................... 20 2.3.2 The Production Inefficiency of a Capital-Subsidised Monopoly............................................................22 2.4 The AJ Model of ROR Regulation of the Monopoly.................................................. 25 2.4.1 The Constraint on the ROR-Regulated Monopoly..................................................................................25 2.4.2 The Behaviour of the Monopoly under the AJ Model of ROR Regulation..............................................26 2.4.3 Depicting the AJ ROR-regulated Monopoly in the Input Space............................................................. 30 2.5 Comparing the ROR-Regulated and Capital-Subsidised Monopoly......................... 31 2.5.1 ROR Regulation and the Equivalent Capital Subsidy.............................................................................31 2.5.2 The Lower the Fair Rate, The Greater the Assistance to the Monopoly?..............................................34 2.5.3 Does a Production Subsidy Welfare-Dominate ROR Regulation?........................................................37 2.5.4 Price Regulation and the Equivalent Production Subsidy......................................................................38 2.5.5 The Property Tax of Yang and Fox (1994).............................................................................................39 2.5.6 Comparing the Pre-Tax and Post-Tax Cost of Capital............................................................................39 2.5.7 The Better the Regulator, The Worse the Outcome?........................................................................... 40 2.6 An Alternative Model of ROR Regulation....................................................................42 2.6.1 A Model of ROR Regulation with Shareholders and Management.......................................................42 2.6.1.1 Assumptions of The Model..............................................................................................................42 2.6.1.2 The Behaviour of Management........................................................................................................43 2.6.1.3 The Behaviour of Shareholders........................................................................................................44 2.6.2 ROR Regulation with Shareholders and Management: A Worked Example....................................45 2.6.2.1 The Unregulated Monopoly Outcome..............................................................................................46 2.6.2.2 The Behaviour of Management.......................................................................................................47 2.6.2.3 The Maximisation Problem for Shareholders.................................................................................. 49 2.7 Conclusion.................................................................................................................... 52 CHAPTER 3: WELFARE UNDER ROR REGULATION............................................. 54 3.

Issues in access pricing : investment and the fair rate of return for a regulated monopoly

This paper compares the output and revenue effects in the rate-of-return regulated monopoly model. Both the ad valorem and the unit tax generally decrease the use of capital, and as such, reduce the output and raise the price. In addition, it is shown that Suits and Musgrave's conclusion of higher revenue of an ad valorem tax at a given output can apply to a regulated monopolist if the marginal product of labor under the ad valorem tax is greater than or equal to that under the unit tax. Similarly, their second conclusion, that for a given tax revenue an ad valorem tax has a larger output than a unit tax rate before the revenue-maximizing tax rate, can also apply to the regulated monopolist.

A comparison of Ad valorem and per unit taxes in regulated monopolies

The impact of the property tax on a fair rate of return regulated firm is examined. We find that a change in the tax rate has exactly the same effect on factor employment, output and hence the price as an equivalent change in the allowed rate of return. However, an increase in the allowed rate of return will lead to higher profits, whereas the same increase in the property tax rate will decrease profits. We find that an increase in the tax rate or allowed rate of return may result in a net increase in social welfare. This result contradicts the long-established belief that a lower (or no) tax is preferred to a higher tax rate in maximizing welfare. Finally, a linear iso-welfare locus is derived which creates the possibility of the regulatory agency or the tax authority offsetting the negative effects of the other's policy.

A welfare anomaly in the rate-of-return regulated monopoly model which creates opportunities for offsetting taxation and regulatory policies

This paper purports to provide a theoretical underpinning for the problem of the Investment Company Act. The theory of the Le Chatelier Principle is wellknown in thermodynamics: The system tends to adjust itself to a new equilibrium as far as possible. In capital market equilibrium, added constraints on portfolio investment on each stock can lead to inefficiency manifested in the right-shifting efficiency frontier. According to the empirical study, the potential loss can amount to millions of dollars coupled with a higher risk-free rate and greater transaction and information costs.

The Le Chatelier Principle of the capital market equilibrium

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A welfare anomaly in the rate-of-return regulated monopoly model which creates opportunities for offsetting taxation and regulatory policies

A comparison of Ad valorem and per unit taxes in regulated monopolies

The Le Chatelier Principle of the capital market equilibrium