ABSTRACT
Marshall proposed that diminishing returns industries should be taxed and increasing returns industries should be subsidized. This proposition has been misunderstood by modern scholars on the basis that Marshall forgot to consider the changes in producers’ surplus in his demonstration. We vindicate Marshall as that criticism by modern scholars is based on their confusion of particular expenses curves and supply curves, which Marshall correctly distinguished. It is suggested that Marshall's proposition can also be applied to the case of variable returns due to internal economies through his life-cycle theory of firms.
