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Unformatted text preview: Taxation Natural Monopoly Monopoly Chapter 24 (cont.) monoply.gif (GIF Image, 289x289 pixels) http://i4.photobu Taxation Natural Monopoly Report on Midterm 1 Out of 50: Mean 31 Median = 32 Standard Deviation 9.5 Approx grade cutoffs: A range: 40 or 41 B range: 32 (median) C range: 21 Taxation Natural Monopoly Report on Midterm 1 Midterm 1 histogram 0% 5% 10% 15% 20% 25% 30% 15 20 25 30 35 40 45 50 score < or = to Taxation Natural Monopoly Motivating Questions What price and quantity does a monopoly choose? What are the welfare effects of monopoly? What are the effects of taxes on monopolies? Is monopoly ever justified/efficient? Monopoly Behavior: price discrimination Taxation Natural Monopoly Taxation and Monopoly Consider a quantity tax, t per unit Consumers pay p = P ( y ), but monopoly only gets P ( y ) t Profit maximization problem: max y ( P ( y ) t ) y C ( y ) = max y P ( y ) y C ( y ) ty Optimal condition: MR ( y ) = MC ( y ) + t Taxation Natural Monopoly Example: Linear Demand Inverse demand: P ( y ) = 10 y ; cost: C ( y ) = 4 y Find MR: MR ( y ) = 10 2 y Find MC: MC ( y ) = 4 Optimality condition: MR ( y ) = MC ( y ) + t 10 2 y = 4 + t , So y t = 6 t 2 = 3 t 2 Find price by plugging into inverse demand: p t = 10 (3 t 2 ) = 7 + t 2 Notice: with t = 0, p m = 7, so the tax raises the price by p t p m = t 2 , i.e. less than the full amount of the tax. Taxation Natural Monopoly Monopoly Taxation General (not just for monopoly) question: how much of a tax is passed to the consumer? Recall our analysis of tax incidence competitive firms: the price rises by less than the amount of the tax. Taxation and Competitive Firm With competitive firms, price will rise by less than tax....
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This note was uploaded on 12/26/2011 for the course ECON 100B taught by Professor Kilenthong during the Fall '08 term at UCSB.
 Fall '08
 KILENTHONG
 Monopoly

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