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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 15.17: Lump Sum Monopoly Profit Tax 
Pr ice
Quantity
T
M
MR
AR
O
P
S
A
e
MC
AC
B
C

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In figure 15.17, initial equilibrium is e when MR = MC. Thus, 
PM is the price. PABC is total profit. A lump sum tax CPST is 
imposed. But this does not disturb the monopolist‘s equilibrium. 
Hence, there is no change in price or output and the entire tax 
burden is on the monopolist. 
It may, thus be concluded that a tax proportionate to the 
monopoly output may be shifted as it increases the marginal cost of 
the monopolist firm (Under monopoly, thus, an excise duty may be 
shifted). But, a lump sum tax on monopoly profit or tax 
proportionate to sales is not likely to be shifted. 
(iii) Incidence of Diminishing Tax 
If a tax is such that it diminishes with the increase in output, 
the monopolist will be interested in producing more and selling it by 
lowering the price. So, he does not shift the tax burden on the 
buyer who bears the entire tax himself.
Check Your Progress: 
1. What do you understand by Incidence of taxation? 
2. What is the difference between Impact, Shifting and 
Incidence? 
3. Distinguish between Money burden and Real burden. 
4. Distinguish between Formal incidence and Effective 
incidence. 
5. State the factors influencing incidence of taxation. 
15.3 EXCESS BURDEN OF TAXATION
The excess burden of taxation is the efficiency cost, or 
deadweight loss, associated with taxation. It is the economic loss 
that society suffers as a result of a tax, over and above the revenue 
it collects. A tax interferes with economic decisions and distorts 
efficient choice. Therefore, an efficient tax policy should try to 
minimize this excess burden, deadweight loss, or efficiency cost of 
tax. 
The only way of avoiding an excess burden of taxation would 
be to obtain all revenue from lumpsum tax such as head tax. It is 

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unrelated to any economic activity and everyone will pay the same 
amount of tax. However, this is not acceptable on equity grounds. 
Generally, taxes are based on ability to pay and therefore, 
they are based on economic indices such as income, consumption, 
or wealth. Thus, taxation which is based on the principle of equity 
must be based on economic activity. This will interfere with 
economic choice and hence will cause an excess burden. 
The excess burden of different taxes is explained below.