Edgeworth Tax Paradox

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The Edgeworth Tax Paradox was first described by Francis Ysidro Edgeworth in 1897 , the proof was later provided by Harold Hotelling . The designation as a paradox comes from a counter-intuitive development of sales prices in a special market constellation .

Economic statement

In a monopoly market, when a volume-proportional tax is levied, the sales price of the taxed goods usually rises , since the producer passes on the increase in his marginal costs (at least in part) to the consumer .

A deviation from this general rule is described by the Edgeworth Tax Paradox: It states that the imposition of a sales volume-proportional tax on a product can lead to a decrease in all optimal prices of demand- related products. This can even mean that the sales price of the taxed product itself falls below the original, tax-free price despite the tax being levied.

Illustrative example

Edgeworth himself described the paradox with reference to the pricing of a railway company: If a tax is levied on 1st class journeys, the tax is passed on to the passengers as a price increase. Due to the changed price constellation, the demand for 2nd and 3rd class tickets will increase, while the railway company will at the same time expand its offer in these classes. Ultimately, the demand for 1st class journeys will therefore decline to such an extent that the railway company - despite the tax that continues to be levied - will be forced to cut prices in 1st class considerably in order to maintain sufficient demand.

literature

  • Francis Y. Edgeworth: The Pure Theory of Taxation. In: Economic Journal. 1897. (Reprinted in: Papers Relating to Political Economy. Vol II, London 1925, pp. 63–125, here pp. 92–94.)
  • Harold Hotelling: Edgeworth's Taxation Paradox and the Nature of Demand and Supply Functions. In: The Journal of Political Economy. Vol. XL, 1932, pp. 577-616.
  • Martin J. Bailey: Edgeworth's Taxation Paradox and the Nature of Demand Functions. In: Econometrica. Vol XXII, 1954, pp. 72-76.
  • Gebhard Zimmermann: The Edgeworth Tax Paradox. In: WiSt. 7th year, issue 1, January 1978, p. 26.