Commodity Taxation and the Effects of Entry: A Case of Variety Preferences

We study the relationship between commodity taxation and the effect of entry with imperfect competition. We develop a simple general equilibrium model with imperfect competition in which consumers have variety preferences. As a result, we see that introducing specific taxes increases social welfare. Furthermore, we show that the optimal tax rule is contrary to the inverse elasticity rule.Acknowledgement We wish to thank two anonymous referees for their helpful comments.