Commodity tax competition and harmonization taking account cross-border shopping

The purpose of this paper is to analyze Nash tax competition among governments that differ in geographical aspect such as their positions. Each government lying on a linear market maximizes its revenue with respect to its own commodity tax rate, taking into account the cross-border shopping induced by the difference in tax rates. In particular, we examine how the spatial arrangement of governments affect tax rates and government revenues at a Nash equilibrium. rium. We prove that when the size of all countries are identical, the tax rates levied by the governments go down from either market boundary toward the market center, and the adjoining countries of peripheral countries can obtain the largest government revenue.