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Edgeworth’s Taxation Paradox and the Nature of Demand and Supply Functions

In: The Collected Economics Articles of Harold Hotelling

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  • Harold Hotelling

    (Columbia University)

Abstract

That a tax imposed on the seller of a monopolized article may lead to an actual lowering of the price to the buyer has been shown by F. Y. Edgeworth.2 His example was of a railway supplying two classes of passenger service at different prices and, unhindered by governmental interference, setting its rates so as to make its own profit a maximum. When the company is compelled to pay a tax on each first-class ticket, it finds it profitable, in Edgeworth’s example, to reduce rates on both classes of accommodations. Regarding this paradoxical conclusion, Professor Seligman writes:3 The mathematics which can show that the result of a tax is to cheapen the untaxed as well as the taxed commodities will surely be a grateful boon to the perplexed and weary secretaries of the treasury and ministers of finance throughout the world!

Suggested Citation

  • Harold Hotelling, 1990. "Edgeworth’s Taxation Paradox and the Nature of Demand and Supply Functions," Springer Books, in: Adrian C. Darnell (ed.), The Collected Economics Articles of Harold Hotelling, pages 93-122, Springer.
    • Handle: RePEc:spr:sprchp:978-1-4613-8905-7_6
    DOI: 10.1007/978-1-4613-8905-7_6
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