The Principles of Political Economy

Henry Sidgwick

Book III

Chapter VIII


§4. In considering the different occasions for governmental borrowing, we have incidentally noticed that, while the major part of the ordinary income of governments is derived from taxes, a certain portion is actually in most civilized countries obtained from payments for the products of governmental industry, purchased freely by the individuals who need them, just as the commodities provided by private industry are purchased. It will be convenient to distinguish these payments as ``earnings'' of Government. Such ``earnings'' may be classed under two heads, for the purposes of the present discussion. In some cases they are obtained by selling products or services at their market-value, determined by the competition of private industries, as (e.g.) where a government possesses domain-lands and sells the agricultural products obtained by cultivating them, or similarly sells wood out of its forests, &c. In other cases governments have established for themselves a monopoly in certain branches of industry, either to secure the full economic gain obtainable by organizing the industry under a single management, or for the better prevention of fraud, or sometimes with a view to taxation. In Great Britain the only business thus monopolized, besides coinage, is that of conveying letters and telegrams; in other countries various other industries are similarly conducted, as (e.g.) certain kinds of mining, the manufacture and sale of tobacco, opium, even lottery-tickets.

The financial problem is obviously very different in cases of the first and second class respectively. When the price of the commodity supplied by the government is determined by open competition with private industries, the only question is whether the government ought to carry on the business at all; whether it would not be more economically managed if handed over to private capitalists. Under ordinary circumstances, this question may be decided by a mere calculation of the financial profit of the governmental business: but, as we have seen, there are cases where it may be desirable that Government should carry on a certain branch of industry under unremunerative conditions, for the sake of some general utility which the competitive system cannot be trusted to provide.

Where, on the other hand, the industry is protected by a monopoly, there is more difficulty in determining what shall be the amount and price of the commodities supplied. A private monopolist may be assumed to aim at the greatest net gain to himself: and a governmental monopoly ought clearly to be managed on the same principle, so far as it is considered strictly from a financial point of view, as a means of obtaining money for governmental purposes. And though this ought never to be the sole consideration for a government---since it has to regard the interests of those of its subjects who buy the monopolised commodity, and any others who are indirectly affected by its use---still there are cases in which the financial view may reasonably be allowed to prevail; as for instance where the commodity monopolised is a dangerous luxury. Even in other cases it may be on the whole expedient to keep the price of the monopolised commodity above the point that it would otherwise reach, for the sake of the profit to the treasury. But when this is done, it is clear that the purchasers of the commodity are substantially taxed for the benefit of their fellow citizens: in fact the establishment of a monopoly is a recognised mode of raising a tax on an article of consumption. On the other hand if the price be reduced below a certain point, a special bounty is conferred on the purchasers at the expense of the rest of the community. It is not, however, quite clear at what point Government ought to fix the price, if it would avoid burdening one part of the community for the benefit of the other.

(1) It is thought by some that the desired impartiality will be realised, if Government sells the commodity at the lowest price which allows interest on the capital employed at the rate at which Government could borrow it, after paying all the current expenses of production, including the remuneration of all the officials employed and allowance for depreciation of capital. For---it is said---if the national exchequer gains by the business, the extra price that provides the gain is substantially a tax on those who purchase the commodity for the benefit of the rest of the community: while if it loses, the community is taxed for the benefit of these particular purchasers. There ought therefore to be neither gain nor loss.

But (2) it appears to me more strictly true that Government avoids interfering with distribution, if it sells the commodity at the price at which it would be sold if provided by private industry. This price, however, may possibly be higher than that at which Government could supply it without gain or loss; since the article may be one which either would be less economically supplied under the conditions of free competition, on one or other of the grounds explained in chap. ii. of this book, or would be practically monopolised. In this case I should urge that the advantage which the community gains through the business being undertaken by Government is one to which the particular purchasers of the article have no claim; and that therefore if the price of the article is reduced, in the interest of production, the reduction ought to be regarded as a special benefit to them, for which allowance would have to be made in a perfectly fair adjustment of the whole system of taxation. I admit, however, that the criterion which I regard as the true one cannot easily be made exact; since under ordinary circumstances we can only conjecture roughly the price at which any commodity would be supplied by private industry.

But further: I have hitherto spoken, for simplicity, as if there were only one product to be considered: but in important cases the practical problem is to fix a scale of prices for a number of different commodities, supplied under different economic conditions as regards both cost and demand. Thus (e.g.) a railway provides conveyance suitable for different classes of persons, and for different kinds of things varying in the proportion of weight to bulk, and in the degree of care required for safe conveyance: and it conveys persons and things through a great variety of distances. On what principle, then, are the prices of these different commodities to be determined in this and similar cases? This question is often answered by saying that price should be proportioned to cost: but the simplicity of this answer ignores the normal influence of demand on price, the varying intensity of the respective demands for the different commodities, and the great difference between (a) the total expense of supplying the aggregate of commodities and (b) the sum of the additional expenses entailed by each element of the aggregate, when considered separately as an optional addition to the rest. This last consideration is conspicuously exemplified in the case of a railway: since the greater part of the annual expense of a railway---including interest on the initial outlay---does not vary materially with the amount of traffic; and even the average additional cost of each service of conveyance does not bear a fixed ratio to the amount of utility furnished, but generally a ratio that decreases as the whole amount of utility furnished increases. Now it is the interest of the community as a whole that the total amount of utility produced by the railway should be increased, so long (1) as each extra service more than pays its own extra cost and (2) the total cost is met by the aggregate of payments received; provided that this total cost is distributed among the different payments received in such a manner as to keep the aggregate demand for the commodities furnished as great as possible. If the demands for all species of such commodities were equally extensible, it would be economically advantageous---as well as obviously fair from the point of view of individual purchasers---that each payment should bear a share of the total expenses corresponding to, the extra cost of the commodity paid for. But as in fact these demands are liable to be very unequal in extensibility, it may be necessary for the most economic management of the business that the unvarying element of the total expenses should be distributed unequally among the different payments: the greater share being borne by those species of commodities for which the demand is less reducible by a rise in price and the larger share by those for which the demand is more reducible. Accordingly I hold that in the governmental management of such branches of production inequalities in the charges for different commodities, based on differences of demand and not of cost, are quite legitimate; though they certainly involve inequalities in the treatment of different sets of consumers, which ought to be somehow compensated in an ideally exact adjustment of the pecuniary burdens imposed by government. But it should be observed that similar inequalities are in other ways inseparable from the most economic management of governmental monopolies: e.g. the simplicity of our penny post is doubtless economical on the whole, but it certainly makes the internal correspondence of London pay for the correspondence between remote parts of the kingdom.

On similar grounds, the general principle of `differential rates' must, I conceive, be admitted as legitimate, in the regulation by Government of railways under joint-stock management; so far as it can be shewn that a closer correspondence of price with cost would really render the railway less useful on the whole. The aim of government should be to prevent the supply of commodities that it regulates from being scanty and dear, but not necessarily to prevent the commodities from being unequally priced.

I do not mean to say that a private company should be left altogether unchecked in the arrangement of such differential rates, on the ground that its private interests in this matter will always coincide with the interest of the public. Such a universal coincidence cannot be affirmed: indeed a possible divergence between the two becomes manifest when we consider that one main cause, in the case of a railway, of the differences of demand above-mentioned is the partial competition of other railways and steamships---a competition which is often effective for certain long distances while leaving a multitude of shorter distances unaffected. It might be for the private interest of a railway company to make temporary reductions of price, which could not be permanently maintained without economic loss, in order to win in such a competitive struggle: but it can rarely be the interest of the community that government should do this or allow it to be done.

Sometimes, indeed, it may be on special grounds the real interest of the community, considered as an aggregate of individuals, that a commodity furnished by government should be supplied at a price financially unremunerative: even, it may be, at a price that will not yield ordinary interest on the capital employed. Indeed if this capital were not borrowed, and if we had not to consider the need of raising supplies for other branches of governmental expenditure, there would seem to be no reason why the condition of paying interest should be regarded at all, any more than it would be regarded in a community socialistically organized; it would be economically advantageous to extend the supply of the commodity by cheapening its price so long as it more than repaid the total cost of the labour spent in furnishing it---including the labour required for keeping in repair and duly improving the instruments used in the business. But since actually any portion of national income sacrificed in this way,---by a reduction of price below what would have to be paid apart from governmental interference---must be made up by some other tax, it will only be desirable to make such a reduction where it is important for the community generally that the commodity in question should be widely used:---as (e.g.) in the case of education.

[Back to:][PPE, Book III, Chapter 8, Section 3]  Public Finance
[Forward to:] [PPE, Book III, Chapter 8, Section 5]  Public Finance
[Up to:]
[PPE Intro and Table of Contents]