98. All Taxes on Monopolies Will Not Be Shifted to the Consumer

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GMT - 3 Hours 98. All Taxes on Monopolies Will Not Be Shifted to the Consumer

Post by Simba on Thu May 01, 2014 4:51 pm

98. All Taxes on Monopolies Will Not Be Shifted to the Consumer
The opinion is prevalent among the uninformed that a monopolist has absolute control in fixing price - that he can fix it at any place he chooses. A tax placed upon a monopoly or upon a monopoly-produced good, then, is believed to be shifted over to the consumer by the monopolist simply adding the amount of the tax to the price of the product.
A monopolist, however, possesses no such broad powers. In some cases a tax may be shifted, or partially shifted, while in other cases no attempt would be made to shift the tax burden. When shifting is accomplished, even by a monopoly, the same laws of price must be observed as in any other case of shifting. A monopolist can have very little, if any, direct control over demand. A good produced by a monopoly possesses no more utility than if it were produced under competitive conditions, and it will bring no higher price. The power of the monopolist lies in his ability to control the amount of goods which will be placed on the market, and this supply in conjunction with the existing demand will determine the price. The attempt will ordinarily be made to regulate the supply so as to receive the highest net returns.
Tax on Each Unit of Goods. - The probability that taxes placed upon a monopoly will be shifted can best be studied from an illustration. Suppose the conditions of cost and demand for a good produced by a monopoly to correspond to the following schedule:
Number ProducedCost of
Each
Selling Price of EachMonopoly ProfitProfit with $2.00 Tax per Unit
25$5.00$20.00$375.00$325.00
504.5018.00675.00575.00
754.3015.50840.00690.00
1004.1512.75860.00660.00
1254.1010.00738.50488.50
1504.058.00593.50293.50
1754.004.00............350.00 (loss)
It is to be remembered that the monopolist has control over the supply schedule, but not over the demand. He will presumably fix the supply at the place where he will receive the highest net return, which in the schedule will be 100 units of the commodity. At this number the net profit is $860 - more than if any other number were put on the market. Suppose, now, the government places a $2 tax upon each unit of the good produced. The monopoly profits, after paying the tax, are shown in the last column of the schedule. The greatest monopoly profit will now occur when 75 units of the good are produced rather than 100. The imposition of the tax will cause a curtailment of supply from 100 to 75, with a corresponding rise in price from $12.75 to $15.50 per unit. In this particular instance the price has risen by more than the amount of the tax, even though the total returns to the monopoly are less than before the levy of the tax.
With a different tax or a different schedule it is possible that the price might rise because of a tax, but by an amount less than the tax. A tax on the number of units produced, moreover, may not affect, in the least, the supply of goods offered. It is easily possible, if the tax be small, that the point of highest net returns will be at the same point in the supply schedule as before the tax levy. In such a case the tax burden is borne by the monopoly.
Net Returns or Lump Sum Tax. - Taxes on a monopoly, instead of being levied on each unit of goods, may be levied on the net returns or in a lump sum. In neither of these cases would there be any attempt to shift the tax through a readjustment of the supply schedule. In the above schedule suppose a 10 per cent tax has been levied upon the net returns. The highest net returns will still be obtained by producing exactly the same as before the tax was levied. Ten per cent of the net return from 100 units will leave a larger amount than a 10 per cent reduction from any other point in the schedule.
Had the tax been a lump sum of $50 instead of 10 per cent on net returns, the result would have been the same. Fifty dollars taken from $880 will leave a greater amount than if taken from any other item in the schedule, and the monopolist will continue to produce as before the levy of the tax. A tax upon gross receipts, however, may cause a change in the supply schedule and at least a partial shifting of the tax.
The method of levying a tax on monopoly-produced goods is important, therefore, from the standpoint of shifting and incidence. If it be the intention of the fiscal authorities to levy a tax which has the possibility of being shifted, then it will be placed upon the units of commodities produced, or possibly upon the gross receipts. If, however, no shifting be desired, and it is contemplated that the monopoly must bear the entire tax burden, the levy will either be in lump sum or on the net returns. Some of the practical considerations of the method of levy will be considered elsewhere.
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GMT - 3 Hours Re: 98. All Taxes on Monopolies Will Not Be Shifted to the Consumer

Post by Bao on Thu Jun 01, 2017 5:09 pm

wonderful briefly explain








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