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The Perverse Effects of Sale Taxes and Price Controls and an Equilibrium Search Model

Author

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  • Fershtman, Chaim
  • Fishman, Arthur

Abstract

If industrial policy is to be effective, it is essential that its effects on market performance be well understood. This paper examines the effects of sales taxes, price ceilings and minimum wages on the performance of markets in which agents must invest in costly search to become informed about prices or wages. In this context it is found that the market equilibrium may respond to changes in policy instruments in strikingly counterintuitive ways. In particular, the imposition of price ceilings and minimum wages may respectively result in substantial consumer price increases and wage decreases. Similarly, an increase in the sales tax may substantially reduce the consumer price.

Suggested Citation

  • Fershtman, Chaim & Fishman, Arthur, 1989. "The Perverse Effects of Sale Taxes and Price Controls and an Equilibrium Search Model," Foerder Institute for Economic Research Working Papers 275462, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275462
    DOI: 10.22004/ag.econ.275462
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