Indirect taxation, quality choice, and social welfare

This paper takes into account the quality of the products in an oligopolistic framework to examine the superiority of a specific tax versus an ad valorem tax. We find that the government can get more tax revenues by adopting ad valorem tax compared with specific tax. In the case of fixed marginal cost, the consumer surplus and social welfare is higher (lower) under specific tax than ad valorem tax if the marginal cost gap is small (large). When the marginal cost is related to product quality, we find that the consumer surplus and social welfare is higher under specific tax.