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"Optimal taxation, Monopolistic Competition and Trade"

Abstract : In this paper, we use a simple extension model of Dixit and Stiglitz( 1977) to address optimal taxation in monopolistic competition in a two countries model. Taxes may be used to prevent monopolistic distortions, create income, and for distributive reasons in an open economy with a supranational authority. We discover that the first best can be decentralized, and locally manufactured and sold goods may be subject to lower taxes than those that are imported or exported. The value of labor productivity should be taken into account when determining the appropriate tax rate ; but, as competition increases, the significance of this factor steadily declines.