Distribution and Dynamics in a Simple Tax Regime Transition

We examine transitions between excise tax and license fee regimes in the laboratory. The regimes have matched equilibrium Marshallian surplus, but license fees generate more tax revenue. The license fees are large “avoidable costs,” known to hamper competitive equilibrium convergence. With moderately experienced subjects, the prolonged transition to the license fee equilibrium has these features: (1) Prices below equilibrium levels, resulting in firm losses; (2) Marshallian surplus above equilibrium levels; and (3) transitional windfalls for the tax authority. With highly experienced subjects, license fees lead to the instability and lower seller profits and efficiency observed in past avoidable cost markets.