Pass-Through as an Economic Tool

Posted by D. Daniel Sokol

E. Glen Weyl, University of Chicago; University of Toulouse 1 - Toulouse School of Economics and Michal Fabinger, Pennsylvania State University discuss Pass-Through as an Economic Tool.

ABSTRACT: We extend five principles of tax incidence under perfect competition to a general model of imperfect competition. The principles cover 1) the independence of physical and economic incidence, the 2) qualitative and 3) quantitative manner in which taxes are split between consumers and producers, 4) the determinants of tax pass-through and 5) the integration of local incidence to determine the overall division of surplus. We show how these principles can be used to simplify and generalize the analysis of a range of economic questions such as the optimal procurement of new markets and the welfare effects of third-degree price discrimination.