If the government wanted to encourage a monopoly to produce the socially efficie
ID: 1185993 • Letter: I
Question
If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unit subsidy? Explain how this tax or subsidy would achieve the socially efficient level of output. Among the various interested parties-the monopoly firm, the monopoly's consumers, and other taxpayers - who would support the policy and who would oppose it? If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unit subsidy? Explain how this tax or subsidy would achieve the socially efficient level of output. Among the various interested parties-the monopoly firm, the monopoly's consumers, and other taxpayers - who would support the policy and who would oppose it?Explanation / Answer
Let's pretend that the per-unit tax is placed on the consumer. (We know that it doesn't really matter whether we place it on consumers or producers, it has the same effect in the long run.) This shifts the demand curve down/right/outward, and also the MR curve down/right/outward. The monopolist finds it profitable to produce more, and at lower costs. This improves economic efficiency. The government can keep increasing the tax until the monopolist produces the same amount that a competitive would have done, which is also the most efficient amount. Overall, economic surplus increases --- meaning that the gains are bigger than the losses. Consumers are better off, since they get more goods at a cheaper price; the government is better off, since they get some tax revenue; the only loser is the monopoly firm (who has lost some of its profits.). The government and consumers would support this move, while businesses would oppose it.