Question

The government is considering imposing a tax on Bell, and it is assumed that, as a monopoly, Bell would be able to increase prices and shift the tax on to consumers. Is this assumption correct?

1. What would be the impact on the price paid by consumers for Bell's products?

2. What would be the impact of the tax on the final price received by Bell?

3. Based on the above, what can you conclude about the incidence of this tax on Bell?

Answer 1

Since the government is considering imposing a tax on Bell, and it is assumed that, as a monopoly, Bell would be able to increase prices and shift the tax on to consumers. No, this assumption is not correct fully because the part of tax will be borne by the monopolist and part will be borne by the consumers. The burden of the tax will depend upon the elasticity of demand and supply curve.

1. The tax will increase the price paid by the consumers for Bell's products.

2. The tax will increase the final price received by Bell.

3. Based on the above, it can be concluded that the tax some burden falls on the producer and some burden falls on the consumers although it has been imposed on the Bell, but the burden is shared with the consumers.