Reference no: EM13975102

If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unity subsidy? Explain how this tax or subsidy would achieve the socially efficient level of output. Among the various interested parties- the monopoly firm- the monopoly's consumers and other tax papers- who would support the policy and who would oppose it? SOLUTIO Computation of the following When we want a socially efficient quantity we need to give a per unit subsidy to the monopolist. This is because the firm produces at Qm, which is less than Qs-socially efficient level. To encourage higher output the firm has to be compensated for the losses from the higher output. The subsidy lowers costs of production to MC1. Now when the firm equates MC1 with its MPB we arrive at Qs as the optimal level of output. The only loser is tax payer, who may not even use this good, yet he pays for it. The monopolist is happy as he continues to maximize its profits in both situations by equating MC with MPB benefits / cost MC MC1 MSB MPB Qm Qs Q MPB: marginal private benefit MSB: marginal social benefit.