Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297022 
Year of Publication: 
2023
Series/Report no.: 
Working Papers No. 2023-20
Publisher: 
Banco de México, Ciudad de México
Abstract: 
We develop a theory of commodity taxation featuring imperfect competition along with love-of-variety preferences and endogenous firm entry and exit, and we derive new formulas for the efficiency and pass-through of specific and ad valorem taxes. These formulas unify existing canonical ones and feature a new term capturing the effect of variety on consumer surplus. Intuitively, if taxes reduce product varieties in the market, then the impact on social welfare depends on how much consumers value variety. As a proof-of-concept, we use the theoretical formulas to identify love-ofvariety preferences in an empirical application. Our welfare analysis shows that the marginal excess burden of taxation is very sensitive to the estimated love-of-variety, which can overturn classical results on the desirability of ad valorem versus specific taxation
Subjects: 
Public Economics
Taxation
Tax Incidence
Sales Tax
JEL: 
H20
H22
H71
Document Type: 
Working Paper
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