ABSTRACT
Certain areas of Marshall’s theory were vulnerable, because of their reliance on questionable assumptions, as is the case with the long-run supply curve, or because they gave rise to controversial policy questions. One such question is whether a system of taxes and subsidies is the best way to deal with “externalities” that impose costs on society. Marshall’s successor, Arthur C. Pigou, became embroiled in a controversy about that matter with the American economist Frank Knight, who is remembered as the founder of the Chicago tradition of economics. Pigou’s approach to the problem, articulated in his Economics of Welfare, built on Marshall’s theory of consumer’s surplus, which depended on the twin assumptions that the marginal utility of money is constant to consumers and that utility, which is subjective, is measurable in Arabic units (e.g. 1, 2, 3 . . .).
