A Note on the Efficiency of Indirect Taxes in an Asymmetric Cournot Oligopoly

Based on product homogeneity and Cournot competition, a recurrent finding in the literature is that ad valorem taxation is welfare superior to unit taxation in noncompetitive markets. This paper first observes that with asymmetric costs inefficient firms are more likely to be inactive in equilibrium under ad valorem taxation than under unit taxation. It is then illustrated that if the inefficient firms¡¯ unit costs and/or the ad valorem tax rate are high enough then unit taxation can be welfare superior to ad valorem taxation.