Tax-induced multiple equilibria

John Whalley and Shunming Zhang ()

Applied Economics Letters, 2011, vol. 18, issue 15, 1469-1477

Abstract: In this article, we present examples of tax-distorted general equilibrium economies in which equilibria are unique in the absence of taxes, but taxes generate multiplicity when introduced over a range of tax rates. We also provide converse examples of economies with multiple no-tax equilibria, but where taxes when introduced induce uniqueness. Both Foster and Sonnenschein (1970) and Kehoe (1985) discussed the possibility of tax-induced multiplicity. Here, we show how in 2-individual 2-good pure exchange economies with Constant Elasticity of Substitution/Linear Expenditure System (CES/LES) preferences such cases can occur. We also provide ranges of consumption tax rates over which these cases can occur for alternative parameterizations.

Date: 2011
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DOI: 10.1080/13504851.2010.543065

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