Network externalities, trade costs, and the choice of commodity taxation principle.

This paper provides a new explanation for the choice of commodity tax principle when introducing network externalities into the intra-industry trade model. First, regardless of the destination or origin principle, when the network externalities are strong (weak), the optimal commodity tax rate in the presence of network externality is positive (negative) and higher (lower) than that without network externality. Second, the interplay between network externalities and trade costs affects the difference in commodity tax rates, influencing the differences in firms' profits, consumer surplus, tax revenues, and social welfare. Third, if the origin principle's commodity tax rate is higher (lower) than the destination principle's, the origin principle's social welfare level is lower (higher) than the destination principle's. [ABSTRACT FROM AUTHOR]