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A new version of Edgeworth's taxation paradox

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  • Robert A. Ritz

Abstract

Edgeworth's taxation paradox states that a unit tax can decrease the market price of a good. This paper presents a new version of the paradox in which a tax reduces price--and increases industry output--because it attracts additional entry into the market. It is particularly striking that the demand conditions under which cost pass-through exceeds 100% for a fixed number of firms are also those for which pass-through can turn negative with endogenous entry. A novel application to the environment shows that a Pigouvian emissions tax can lead to an increase in industry emissions. A basic principle of environmental policy therefore fails under the conditions of the paradox. Copyright 2014 Oxford University Press 2013 All rights reserved, Oxford University Press.

Suggested Citation

  • Robert A. Ritz, 2014. "A new version of Edgeworth's taxation paradox," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 209-226, January.
    • Handle: RePEc:oup:oxecpp:v:66:y:2014:i:1:p:209-226
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    File URL: http://hdl.handle.net/10.1093/oep/gpt003
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    Cited by:

    1. Robert A. Ritz, 2018. "Oligopolistic competition and welfare," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 7, pages 181-200, Edward Elgar Publishing.
    2. Marc St‐Pierre & Aaron A. Elrod, 2022. "The perverse effect of environmental regulation on emissions: The role of product‐mix changes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(1), pages 197-235, February.
    3. Kojun Hamada & Takao Ohkawa & Makoto Okamura, 2023. "Edgeworth's taxation paradox when firms engage in cost‐reducing investment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(4), pages 391-397, September.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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