Optimal taxation of a monopolistic extractor: are subsidies necessary?

Julien Daubanes
In a standard partial equilibrium model of resource depletion, this paper characterizes and examines the solution to the optimal taxation problem when extraction is monopolistic. The main result is that the family of subgame perfect efficiency-inducing tax/subsidy schemes may include some strict tax policies. This illustrates how the static trade-off between inducing efficiency and raising tax revenues in the presence of market power is relaxed under exhaustibility.
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