Question

Suppose a per unit tax is imposed on a monopolist.

a) How does this affect output price?

b) How are profits affected?

c) What can you say about the burden of the tax – who bears it?

Answer 1

Per unit tax is a tax which is a fixed amount imposed on each unit of good sold.

a. When per unit tax is imposed on a monopolist, it will increase the monopolists average costs and marginal costs. This will reduce the equilibrium output of the monopolist ad which will in turn increase the output price. Thus is a per unit tax is imposed on a monopolist, it will increase the output price.

b. His profit will be unaffected because if a unit tax is impost on a monopolist , he will transfer it to the buyer by increasing the price. Thus his profit will remain same.

c. Depending on the price elasticity of supply the burden of taxation is borne by the buyer. That means if the market supply is more elastic then the tax burden on buyers will be more and less on monopolist.