Comparison between specific taxation and volume quotas in a free entry Cournot oligopoly
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We revisit the classic discussion of the comparison between tax and quota, but in a free-entry Cournot oligopoly. We investigate a quantity ceiling regulation as a quota policy. We find that tariff-quota equivalence holds if the firms are symmetric and the number of firms is given exogenously. However the equivalence does not hold and taxes dominate quotas in the free entry market because quota can increases the number of entering firms and increases the loss caused by excessive entries.
KeywordsEndogenous market structure Externality Tariff-quota equivalence
JEL ClassificationL13 H25
We are indebted to two anonymous referees for their precious and constructive comments and suggestions. Needless to say, we are responsible for any remaining errors. We gratefully acknowledge financial supports of Grant-in-Aid from the Japanese Ministry of Education, Culture, Sports, Science and Technology and Japan Society for the Promotion of Science.
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