H4 POLITICAL ECONOMY 



excess of injury to the buyers and sellers will be large, compared 

 with the produce of the tax. This fact is one justification of 

 free-trade. 



There is a certain magnitude of tax which will produce the 

 maximum revenue or value for the area M C C'M'. The ratio in 

 which the tax falls, in one sense, on sellers and buyers is simply 

 the ratio of the diminution of price obtained by the sellers to the 

 increase of price paid by the buyers. 



It is absolutely clear that this is the proportion in which the 

 tax is actually paid by the two parties, although this may by no 

 means correspond to the relative suffering inflicted on the two 

 parties, nor is it even the proportion in which the two parties 

 lose by the loss of trade profit. The whole loss of either party 

 is, as the diagram shows, always greater than the tax they pay. 

 The relative total losses of the two communities as traders, are 

 in proportion to the areas MOD M" and M'C'D M" ; and these 

 areas might approximately, at least, be ascertained by experi- 

 ments for this purpose ; treating C D and O'D as straight lines, 

 we only require to know the quantity and price of the goods 

 before the imposition of the tax, and the quantity and price 

 afterwards. 



Thus, if a tax of 2d. per pound were imposed on the trade 

 in cotton between ourselves and America, if before the tax we 

 imported 500 million Ibs. at one shilling, and after 'the tax 300 

 million Ibs. for which we paid 13^., and the Americans re- 

 ceived 11 ^d., the total loss to the two communities as traders 

 would be 600 + 200 = 800 million pennies, the produce of the 

 tax 600 million pennies. 



England would pay of the tax 450 million pennies. 

 England's total loss would be 600 million pennies. America 

 would pay of the tax 150 million pennies. America's total loss 

 would be 200 million pennies. The incidence would be the 

 same whichever government levied the tax. 



It follows from the above principles, that if a holder sells 

 unreservedly, trusting to the competition between the buyers to 

 produce the market, the whole tax falls on the seller; the 

 supply curve becomes a vertical straight line. If a buyer buys 

 unreservedly, the whole tax falls on him ; in this case the 

 demand curve becomes a vertical straight line. 





