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A new version of Edgeworth's taxation paradox

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  • Robert A. Ritz

Abstract

Edgworth's taxation paradox states that an excise tax can decrease the market price of a good. This paper presents a new version of the paradox in which a tax reduces price because it attracts entry of additional firms into the market. The paper also presents two new applications: (i) an emissions tax that leads to an increase in industry emissions (due to entry), and (ii) an interest rate cut by the central bank that reduces lending by commercial banks (due to exit). Basic principles of environmental regulation and monetary policy therefore fail under the conditions of the paradox.

Suggested Citation

  • Robert A. Ritz, 2010. "A new version of Edgeworth's taxation paradox," Economics Series Working Papers 502, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:502
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper502.pdf
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    References listed on IDEAS

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    1. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "Tax incidence in differentiated product oligopoly," Journal of Public Economics, Elsevier, vol. 81(2), pages 173-192, August.
    2. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 657-680.
    3. Hans Jarle Kind & Marko Köthenbürger & Guttorm Schjelderup, 2006. "Taxation in Two-Sided Markets," CESifo Working Paper Series 1871, CESifo Group Munich.
    4. Salinger, Michael A, 1991. "Vertical Mergers in Multi-product Industries and Edgeworth's Paradox of Taxation," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 545-556, September.
    5. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
    6. Stephen F. Hamilton, 2009. "Excise Taxes with Multiproduct Transactions," American Economic Review, American Economic Association, vol. 99(1), pages 458-471, March.
    7. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
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    Cited by:

    1. Ritz, Robert, 2016. "Oligopolistic competition and welfare," Cambridge Working Papers in Economics 1680, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

    Bank lending; Cost pass-through; Edgeworth's paradox; Environmental regulation; Market structure; Taxation;

    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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