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Faculty of Economics

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Ritz, R.A.

A new version of Edgeworth's taxation paradox

Oxford Economic Papers

Vol. 66(1) pp. 209-226 (2014)

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. JEL codes

JEL Codes: D43, H22, L51, Q58

Author links: Robert Ritz  

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