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

  • Harold Hotelling


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!


Demand Function Integrability Condition Demand Curve Supply Function Supply Curve 
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Copyright information

© Springer-Verlag New York Inc. 1990

Authors and Affiliations

  • Harold Hotelling
    • 1
  1. 1.Columbia UniversityUSA

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