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

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!

Presented at a joint meeting of the Econometric Society and Section K of the American Association for the Advancement of Science, at New Orleans, January 1, 1932.