Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly

This paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. We show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through may be expressed using elasticities and curvatures of demand and inverse demand. These results apply also to symmetric oligopoly with multi-product firms. Finally, we present a generalization with the tax revenue function specified as a general function parametrized by a vector of tax parameters. We define multi-dimensional generalizations of pass-through and show that they are crucial for evaluating welfare changes in response to changes in taxation.