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The Effect of Allocative Efficiency of Free Markets on Entropy and its Implications on Taxes

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  • Stephan Unger

Abstract

This article shows that the entropy in a free market is maximized under the allocative efficiency condition. In contrast to that, it is shown that any pre-determined allocation, as it is the case with the collection and distribution of taxes, exhibits a higher probability of minimizing the entropy in the system, where the loss in entropy corresponds to the deadweight loss caused by the excess burden of taxation. The implications are that any chaotic system, or exchange economy, converges to an optimal structure of wealth distribution which maximizes social welfare, in contrast to a randomly, pre-determined distribution of wealth.

Suggested Citation

  • Stephan Unger, 2019. "The Effect of Allocative Efficiency of Free Markets on Entropy and its Implications on Taxes," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 5(4), pages 287-300, October.
    • Handle: RePEc:ate:journl:ajbev5i4-2
    DOI: 10.30958/ajbe.5-4-2
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    References listed on IDEAS

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    1. Hans Lind & Roland Granqvist, 2010. "A Note on the Concept of Excess Burden," Economic Analysis and Policy, Elsevier, vol. 40(1), pages 78-88, March.
    2. James R. Hines, 1999. "Three Sides of Harberger Triangles," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 167-188, Spring.
    3. Joan Robinson, 1969. "The Economics of Imperfect Competition," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-1-349-15320-6, March.
    4. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
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