, Volume 1, Issue 4, pp 373-389

A first-best regulatory tax for oligopoly

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This paper addresses the question of how a regulator with imperfect knowledge of costs and demand can beneficially regulate the output levels of an industry characterized by some combination of externalities and market power. A two-part specific tax is derived which attains ex post optimality and is applicable to industries of arbitrary structure and conduct. The informational requirements for the solution are no more stringent than in previous two-part tax mechanisms in conjunction with the assumption of market equilibrium.