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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 (Citation1970) and Kehoe (Citation1985) 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.
Acknowledgements
We are grateful to Srihari Gorindan and Timothy J. Kehoe for discussions. We acknowledge support from IDRC under a programme for general equilibrium policy modelling in development countries, National Social Science Foundation of China (SSFC Grant Number: 07AJL002) and National Natural Science Foundation of China (NSFC Grant Number: 70825003).