Edgeworth's taxation paradox when firms engage in cost-reducing investment |
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Authors: | Kojun Hamada Takao Ohkawa Makoto Okamura |
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Institution: | 1. Faculty of Economic Sciences, Niigata University, Niigata, Japan;2. Faculty of Economics, Ritsumeikan University, Kusatsu, Japan;3. Economics Department, Hiroshima University, Hiroshima, Japan |
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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 paradox 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 occurs are restrictive when there is no investment. By incorporating 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 specific or ad valorem. |
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Keywords: | aggregative game average cost free entry investment taxation paradox |
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