. If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or a per-unit subsidy? Explain how this tax or subsidy would achieve the socially efficient level or output. Among the various interested parties—the monopoly firm, the monopoly’s consumers, and other taxpayers-who would support the policy and who would oppose it?
To encourage a monopoly to produce the socially efficient quantity, the government should use a per-unit subsidy rather than a per-unit tax.
A per-unit subsidy provides a monetary incentive to the monopoly per unit of output it produces. This means that for each unit of output the monopoly produces, the government provides financial support to reduce the cost of production for the monopoly. By doing so, the subsidy effectively lowers the marginal cost of production for the monopoly.
In contrast, a per-unit tax would increase the cost of production for the monopoly. This would discourage the monopoly from producing the socially efficient quantity because it would reduce its profits.
A per-unit subsidy would help the monopoly achieve the socially efficient level of output because it provides an incentive for the monopoly to increase production. The subsidy reduces the financial burden on the monopoly, allowing it to lower prices and produce more output without sacrificing its profitability.
The subsidy aligns the private costs of production with the social costs, leading to the socially efficient level of output. In other words, it helps the monopoly internalize the positive externality associated with producing at the socially efficient quantity. This results in a more optimal allocation of resources, as the monopoly produces more output than it would in the absence of the subsidy.
Among the interested parties, the monopoly firm would support the per-unit subsidy policy. The subsidy reduces its production costs, increases its profitability, and allows it to expand its market share.
The monopoly's consumers would also benefit from the per-unit subsidy policy. Lower production costs would lead to lower prices for the monopoly's goods or services, making them more affordable for consumers.
Other taxpayers might have mixed views on the policy. Those who believe in market competition may oppose the subsidy as it supports the monopoly's market dominance. They may argue that encouraging competition through market entry or promoting alternatives would be more beneficial.
On the other hand, some taxpayers may support the policy if they perceive it as a means to achieve a socially optimal outcome. They may prioritize the overall welfare gains from the subsidy, including lower prices for consumers and the economic benefits associated with the increased production.
It's important to note that the support or opposition to the policy may vary depending on individual perspectives, economic ideologies, and the specific details of the market and the monopoly in question.