Specific commodity taxes,output and location decision under free entry oligopoly

This paper examines the impact of a specific commodity tax as a policy device on output per firm, the number of firms, total output and the location decision of undifferentiated oligopolistic firms in the Weber–Moses triangle. It shows that when the distance between the plant location and the output market is held constant, the impact of an increase in the specific commodity tax on output per firm, the number of firms and total output is consistent with the well-known Besley propositions in the non-spatial setting. Furthermore, when the distance between the plant location and the output market is a decision variable, the impact of a specific commodity tax on the output per firm will be consistent with the well-known Besley proposition. However, the impact of a specific commodity tax on the number of firms and total output is significantly different from the Besley propositions. This indicates that distance and firm’s location decision have important influence on the effects of a change in the specific commodity tax on output and location of oligopolistic firms.