Comments and Questions

To point 1: I assume that most readers read the abstract where the basic intuition is stated. I didn’t want to be repetitive. So I used the introduction to quickly put the condition into perspective with competition and regulation in order to move on and explain the workings of it more elaborately in the main section. I have decided to leave it that way. Point 2: I agree that it may not be appropriate in the context of the paper and removed it but the reader may still consider the following. I wrote: “Everyone would gain from more rational behaviour, including monopolies. Just consider pharmaceutical industries which spend twice as much on marketing than on research and development (Gagnon & Lexchin, 2008). The pharmaceutical industry saves millions of lives and is of particularly important service to society. Monopolies certainly don’t behave in a wasteful and inefficient manner by malicious intent but act within the framework shaped by policy makers and not least the work of economists. “Losses associated with the pursuit of profit provoke ethical considerations in public debate and also among economists. I guess my point was that only when you understand that there is an underlying economic problem you are able to search for and accept solutions to the problem. It is important to not attribute the cause of some problem to some perceived maliciousness which is just our way of determining that there actually is some problem. Of course, ignoring the problem isn’t helpful either. In the current framework certain common market scenarios allow producers to effect inefficient prices. These inefficiencies cause losses rightly identified as something “bad”. The pharma industry was a nice example because due to patent monopolies those losses are relatively large and at the same time people have never been healthier thanks to the advances of the pharmaceutical and chemical industries, which most people agree is a very “good” thing. In the manner we have moved from evil daemons causing our illnesses to an understanding of the human body and modern pharma-industry there is hope that we will understand our society better. E.g. the main culprit for the 07/08 subprime crisis in public debate and also economists is human “greed“. What happened is that banks lent vast amounts of money to borrowers who were in no position to repay their loans. I think this behaviour may be explained when you consider that lending to risky borrowers is simply disproportionately profitable for banks; of course, only until they actually default. This seems like a variation of the market power problem and it would certainly be interesting to scrutinize the effects of the tax-condition in that context.Point 3: I agree. I hope, also with regard to point 4, the excel-tables give an effective example for readers.Point 4: The linear demand and quadratic cost functions used in the set-up are the ones used in the figures of the paper. I prefer the shorter paper without closed form examples.Point 5: Consider it done.Point 6,7: The tax is not meant to turn into a subsidy. If you are referring in point 7 to further discussion of what happens near Q_c I have spent some time in the paper on it but it really is only a special case, e.g. an actual zero-rate seems rather unlikely in reality. If you refer to the whole analysis please be more specific; I hope I have explained everything in a comprehensible fashion.Point 8: I think it was unnecessary to focus directly on economy-wide application. E.g. it ignores the fact that for companies of certain revenue tax-audits and accounting efforts are more elaborate so it’s obvious that tax-evasion and information questions are much different ones compared to, e.g. small businesses in monopolistic competition. Economy-wide application was important to me not only because we generally have monopolistic competition throughout the economy but also things like tax-equality; or if you assume the condition actually works and induces efficiency it would give firms operating under the condition a sort of competitive advantage compared to those operating unmitigated potentially creating unwanted distortions.In general with regard to the applicability part I was presented with the difficulty of actually having to spell out important implications and considerations to be made even if they seem “ambitious” and not exaggerate or, worse, being led to neat but ultimately meaningless speculation. I hope I have managed to stay objective and sober.