A New Version of Edgeworth’s Taxation Paradox
نویسنده
چکیده
Edgeworths 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 rms 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. Keywords: Bank lending, cost pass-through, Edgeworths paradox, environmental regulation, market structure, taxation. JEL classi cations: D43 (imperfect competition), G21 (banks), H22 (tax incidence), Q50 (environmental economics). My thanks are due to Simon Cowan, Stephen Hamilton, John Quah, and John Vickers for helpful comments and advice, and to Glen Weyl for an insightful discussion on the economics of pass-through. All views expressed and any errors are my own.
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