Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

T
M
MR
AR
P
MC
AC
1
P
Q
1
Q
1
MC
1
AC
O
R

---

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 15.15: Monopoly Incidence 
 
 
 
 
Figure 15.16: Constant Cost Monopoly 
In figure 15.14, initial equilibrium is at point e where MC = 
MR. With the imposition of tax, AC becomes AC
1
and MC becomes 
MC
1
. Thus, new equilibrium point is e
1
at which MC
1
= MR. Initial 
price is PQ, new price is P
1
Q
1
. Price rises by P
1
M. Tax imposed is 
RT 
– P
1
M is the tax burden on the buyer and the remaining (RT 
– 
P
1
M) falls on the monopolist. It is obvious that the monopolist 
shares a larger part of tax burden in this case. 
Quantity_A_e_T_M_MR_AR_P_MC_AC_1'>Pr ice
Quantity
A
e
T
M
MR
AR
P
MC
AC
1
P
1
e
Q
1
Q
1
MC
1
AC
O
Pr ice
Quantity
T
M
MR
MC
AR
O
P
1
P
1
MC
S
1
M

---

In figure 15.15, monopolist firm‘s equilibrium is taken at 
falling path of AC curve. Here AT is the unit tax of which only P
1
M is 
shifted on the buyer, which is less than fifty percent of AT. 
It is easy to see that the slope and position of demand curve 
(i.e., elasticity of demand) are very significant in determining the tax 
shifting possibility of a monopolist. If the demand curve faced by the 
monopolist is a straight line and the marginal cost is constant, at 
least over a small range of output, then the price increase will be 
exactly half the amount of the tax.
In figure 15.16, MC, the marginal cost is assumed to be 
constant. AR is the demand curve. A tax ST, raises the marginal 
cost from MC to MC', and price from OP to OP
1
. The increase in 
price PP
1
is exactly half the amount of the tax. It is interesting to 
observe by the full amount of the tax under a similar situation of 
constant costs. 
If however, the demand curve is concave, the price will 
increase by an amount more than half of the tax imposed. Because 
in this case MR being less than price, will slope less steeply than 
the demand curve so that the price rises by an amount greater than 
the tax at the new equilibrium point of MC and MR curves. 
 
(ii) Incidence of Lump Sum Tax 
When a lump sum tax as profit tax or a license fee is 
imposed on a monopoly firm, the monopolist will not shift the 
burden on to the buyers but will try to bear the tax himself. This is 
because a lump sum tax is independent of his output and price 
policy does not disturb his equilibrium position as shown in
figure 15.17.