Product Quality Under Specific and Ad Valorem Taxation

Abstract

This article generalizes existing results on the effects of specific and ad valorem taxes on product quality in competitive markets. It is shown that the critical quantity on which these effects turn is the price elasticity of the marginal valuation of quality. Previous analyses, it emerges, have implicitly focused on the special cases in which this elasticity is zero or unity. It is also shown that there are circumstances in which this elasticity is exactly the reciprocal of the elasticity of substitution between price and quality in the indirect utility function.