Edgeworth's taxation paradox when firms engage in cost‐reducing investment
| Published date | 01 September 2023 |
| Author | Kojun Hamada,Takao Ohkawa,Makoto Okamura |
| Date | 01 September 2023 |
| DOI | http://doi.org/10.1111/sjpe.12346 |
Scott J Polit Econ . 2023;70:391–397.wileyonlinelibrary.com/journal/sjpe
|
391
© 2023 Scottish E conomic Society.
1 | INTRODUCTION
Tax incidence has been an i mportant issue for all t ax authorities and ta xpayers.1 Paradoxicall y, Edgeworth (1925)
first noted th at when a monopoly firm suppl ied two goods, taxing a singl e good could reduce the prices of bot h
goods. This taxation paradox— tax can reduce the price— has attracted the interest of researchers, and several
scholars have exa mined whether and how t he paradox arises. 2 In the long- run equilibrium in a fre e- entry Cournot
oligopoly, De Meza et a l. (1995) showed that the para dox occurs in an ad valorem tax . However, their result also
1Weyl and Fabinger (2013) and Mikló s- Thal and Shaffer (2021) presented general principles of tax incidence in an imperfect competition.
2For example, Ritz (2014) present s a new version of th e paradox when an i ncumbent fir m competes with a p otential entr ant.
Received: 3 Febr uary 2022
|
Accepted: 11 May 2023
DOI: 10 .1111/sjpe.1 2346
SHORT NOTE
Edgeworth's taxation paradox when firms engage
in cost- reducing investment
Kojun Hamada1| Takao Ohkawa2| Makoto Okamura3
1Faculty of Econo mic Sciences, Niig ata
University, Niigata, Japan
2Faculty of Economics, Ritsumeikan
University, Kusatsu, Japan
3Economics Department, Hiroshima
University, Hiroshima, Japan
Correspondence
Kojun Hamada, Fa culty of Economic
Sciences, Ni igata Universit y, 8050 Ikarashi
2- no- cho, Nishi- ku, Niigata, Niigata 950-
2181, Japan.
Email: khamada@econ.niigata-u.ac.jp
Funding information
Japan Societ y for the Promotion o f Science,
Grant/Award Num ber: 20K01629 and
20K01694
Abstract
This study examines whether and when Edgeworth's
taxation paradox, that taxation decreases the equilibrium
price, occurs in a free- entry Cournot oligopoly with cost-
reducing investment. In contrast to the fact that no para-
dox occurs in the short- run equilibrium, the paradox can
occur in the long- run equilibrium, in which the number of
firms is endogenous . However, the conditions under which
the paradox occur s are restrictive when there is no inves t-
ment. By incorpor ating cost- reducing investments into the
model, we demonstrate that the paradox is likely to occur
under less restrictive conditions, irrespective of whether
the tax is specif ic or ad valorem.
KEYWORDS
aggregative g ame, average cost, free ent ry, investment, taxati on
paradox
JEL CLASSIFI CATION
D43, H25, L13
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