amount sold when the tax is imposed. It is seen, thus, that when
the
price increase by P
1
M, the sales contract by QQ
1
amount.
Further, the incidence of the tax P
1
R is divided between the buyers
and sellers.
The buyers share P
1
M and the sellers MR, (thus, P
1
R =
P
1
M + MR).
b) Incidence under Monopoly
A monopolist is a singly seller in the market. He has no
competitor. He has full control of the
market supply of the given
product. He determines his own price policy. He is a price-maker.
He can charge any price he likes. Thus, it may be thought that a
monopolist is interested in profit maximization and therefore, he will
set a price and formulate an output
policy by equating marginal
revenue with marginal cost. Thus, in the case of elastic demand, he
will share a larger burden himself rather than shift it on the buyers.
The tax incidence under monopoly may be analysed in
respect of the nature of the tax as follows:
(i)
A unit tax;
(ii) A lump sum tax; and
(iii) A diminishing tax.
(i) Incidence of Unit Tax
When a unit tax on output is imposed,
tax is added to
marginal cost. Hence, the equilibrium position of the monopoly firm
changes.
Figure 15.14: Monopoly Incidence
Pr ice
Quantity
e
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