Question

Discuss the problems of monopoly and how to control monopoly firms with taxation. Show how a monopolist discriminates two different markets with price

Answer 1

Problems of Monopoly can be defined as follows :

1. Diseconomies of scale
2. Allocative inefficiency.
3. Lack of choice
4. cost Inefficiency.
5. Supernormal Profit. lead to an unequal distribution of income in society.
6. Higher prices to suppliers
7. Lack of incentives.
8. Productive inefficiency
9. Higher prices.

monopoly can be controlled through taxation that is implemented by government by

Imposition of a Specific Tax:

Specific taxes are taxes like excise duty and sales tax. Excise duty are levied on production and  sale tax on sales. it usually becomes the part of variable cost as increase in marginal cost lead to increase in variable cost and finally have effect on average cost due to reason output generated by monopolist reduce and prices increase another effect also leads to fall in the profit level and monopolist has to transfer the burden of tax to the customer in this case of imposition of specific tax.

Imposition of Lump Sum Tax:

the government levies a lump sum tax on monopolists this tax might be profit
tax or license fee are imposed on a firm regardless of its level of output. we consider it as fixed cost and does not become the part of variable cost so it does not affect variable cost so in this case of lump sum tax output level remain the same, price is also same but profit reduced due to average cost rise and supplier only bear the burdun of tax.

we start our discussion regarding discriminates two different markets with price, as we know monopolist is the single seller who control over all supply and market share . monopolist produces homogeneous product but charging differnt prices for different market is based on elasticity of demand when demand elasticity for one market is inelastic then he can charge high price for that market (woolen dresses at cold places) but in case of other market where demand is elastic according he will charge less price for the same goods. woolen dresses at warm places.