Suppose Senator Johnson is a major supporter of customer\'s rights. He feels str

Question

Suppose Senator Johnson is a major supporter of customer's rights. He feels strongly that monopolies exploit customers. Because of this, he argues that they should be punished. As a way to punish monopolies, Senator Johnson proposes a new bill that would impose a per-unit tax on all monopolies. In response to the proposal, you have been asked to make a recommendation concerning the welfare of consumers and society with and without the "monopoly tax." Defend your recommendation. In your recommendation, illustrate how the monopoly tax affects the market equilibrium. If you do not agree with the tax, what other policies might mitigate the inefficiencies created by monopolies?

Explanation / Answer

Monopoly Tax will first alter the marginal cost of monopolist . Not only MC curve but also AC curve will shift in the upward direction . So MR = MC , cuts at a higher point . Now the optimal output decision is determined by MR = MC + T (tax) . This causes equilibrium output to decline and price to rise even further . Thus, consumers feel the burden of tax since monopoly product will now be sold at a higher price then before . However, the change in the price may be greater or equal or smaller than the volume of specific tax . Hence , with this per unit tax , consumers welfare decline .

Other policies that might mitigate the inefficiencies created by monopolies are : government intervention , a tax on profit or lump sum tax etc .

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