This section of the book is from the "Introduction To Public Finance" book, by Carl Copping Plehn.
The revenues derived from prices or from the production and sale of commodities or services are of exactly the same character as the earnings of the people. This is true whether the products sold are derived from the public domain or from public industry. The principle underlying this kind of revenue, the analysis thereof, and to a certain extent the disposition thereof, are the general subjects of Political Economy. To introduce a discussion of it here would be to invade the main fields of economic science. Surely, unless we commit the fallacy commonly attributed to the mercantilists of regarding money alone as wealth, and treat all the money flowing into the treasury as revenue, no matter whether it merely takes the place of other kinds of wealth or not, we must exclude a full discussion of prices from the subject of public revenues.
But since a great deal has been made by writers of note, of the money prices received in this way as a part of public revenues, a few words in defence of this position are necessary.1 Let us take the common example of the water supply. We may suppose that a certain city is supplied with water by two private companies, both of which have the right to lay pipes wherever they wish.
1 Most German authorities discuss either the net or the gross income from domains. Cf. Bastable and Seligman on "Classification."
They will then supply water, supposing that they actually compete, at prices determined mainly by the costs, which are those of management, interest on the " plant," the supplies and runningexpenses. The average prices will be considerably higher than need be by virtue of the duplication of the plant, etc. Suppose, however, before any material duplication is reached they unite, forming one company which has the monopoly. The charges will now be regulated by "what the traffic will bear," and provided the supply is ample will tend to conform to those rates which will yield the largest net returns. The principles by which monopoly prices are regulated are well known to students of economics. The charges in this case cannot be greater than the cost to the citizens of operating their own wells, nor even so high as to induce the citizens to economise materially in their use of water. But suppose that the townspeople are not content with the rates, or with the service. They attempt regulation and fail. They may determine to buy out the plant. Once the city owns the plant it may run it in one of four ways. (1) It may run it as the company did, to make the highest possible profits, charging all or nearly all the traffic will bear. The surplus over costs goes into the treasury and helps to defray the other expenditures. But the rules determining what the traffic will bear are rules of pure economics. There is absolutely no difference between this public business and a private business. The method of " charging what the traffic will bear " is the method in economic life of determining the value of commodities so sold. It takes the place in the sale of monopoly goods of the " free dickerings of the market" by which the price of other goods is determined.1 The private company had to pay expenses, so does the city ; the private company enjoyed a surplus or made an " unearned increment," so does the city ; the private company spent this surplus to the satisfaction of the wants of its stockholders; the city spends the surplus to the benefit or satisfaction of the general wants of the citizens, who may be regarded as its stockholders. Even if it foregoes taking quite all the surplus, the principle is the same. A private company often does that in deference to public opinion. (2) The city may decide not to make money, but to charge only what the service costs and make the service as good as possible. It then foregoes taking the full price of the wealth that it has produced and allows each consumer to enjoy the surplus. Then the payment by the citizen is a fee. (3) It may charge a fee much smaller than the cost, or a fee for all water consumed over a certain amount, but provide a certain amount of water for each citizen at the common cost.
1 See Sidgwick, Bk. II., Ch. X.; Andrews, Institutes of Economics, p. 112; Marshall, Ec. of Ind., pp. 180 ff.; Senior, pp. 103-114 ; Sumner, Essays, p. 46 ; Hadley, B. B. Trans., p. 100 ; Seligman, Railway Tariffs, etc., pp. 8 ff.
(4) It may distribute the water freely and pay for it out of the common fund derived from taxation. Now the sums received in the last three cases are all regarded as payments for the public service. They are an essential part of the public revenues, taxes, and fees, Their amount is not determined by any process known to political economy for determining prices. But so long as the principles determining the amount of the money taken and the management of the business are, as in the first case, purely economic, there is no need of including this money, as distinct from the wealth produced in the revenues of the public treasury, and burdening financial science with a discussion of matters fully within the scope of the larger science. All that we need to say is that the State produced so and so much wealth in the form of such and such commodities which it sold for so and so much money. These economic industrial or commercial revenues are supplemented by others which are of a fiscal character.1
As Professor Cohn has so well pointed out, it is a very different problem that we have to deal with when the management of some industryis made merely the form or means for collecting a tax from certain classes of persons. The French tobacco monopoly, for example, is not in any sense to be looked upon as an industry undertaken in the common interest, or even in the interest of a particular class.
1 Cf. Cohn, sec. 98.
It is the aim of the French government to tax the users of tobacco. This aim is attained by other governments through different processes. The form of a monopoly has been found to be remarkably easy, expedient, and successful as a method of indirect taxation.