Microeconomics: Theory and Applications with Calculus, 4e

11.3 Taxes and Monopoly

Monopolies may face specific taxes (the government charges t dollars per unit) or ad valorem taxes (the government collects $\alpha p$ [&|alp|p&] per unit of output, where $\alpha$ [&|alp|&] is the tax rate, a fraction, and p is the price it charges consumers). Both types of tax raise the price that consumers pay and lower welfare—the same effect as when a government taxes a competitive market (Chapter 2). However, taxes affect a monopoly differently than they affect a competitive industry in two ways.

First, the tax incidence on consumers—the change in the consumers’ price divided by the change in the tax—can exceed 100% in a monopoly market but not in a competitive market. Second, if ad valorem tax rates $\alpha$[&|alp|&] and the specific ...