This paper studies the roles of market power and taxes in determining market surplus and social welfare in the U.S. consumer firearms industry. Using microdata from Massachusetts and aggregate data from other states, we estimate an equilibrium model of the consumer firearms industry. To identify price elasticities, we construct an instrument based on heterogeneous exposure to aggregate shocks to the prices of metal commodities. Although firearm manufacturers charge substantial markups, a calibrated model of firearm-related homicide implies that these markups are poorly targeted towards each product’s homicide externalities. We consider the redesign of a longstanding federal excise tax on firearms (11% on long guns, 10% on handguns), and show considerable welfare gains from a “second-best” optimal tax scheme under the political-economy constraint that surplus among firearm consumers remains constant. We also construct a simple tax redesign (0% on long guns, 15.5% on handguns) that would capture 80% of the potential welfare gains from the constrained-optimal policy. Either tax redesign would lead to pricing better aligned with social welfare from firearm transactions, while preserving consumer surplus and industry profits and improving public health. Politically conservative regions of the U.S. would benefit disproportionately from these tax reforms, suggesting they may also be politically feasible.