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 essentially provides financial assistance to the monopoly firm for each unit of production it produces.
Using a per-unit subsidy would help the monopoly firm reduce its costs of production and increase its profits for producing the socially efficient level of output. The subsidy effectively acts as an incentive for the firm to increase its production because it reduces the gap between the marginal cost and the marginal benefit of production. As a result, the firm would be more inclined to produce the quantity that aligns with social efficiency.
The subsidy would achieve the socially efficient level of output by closing the gap between the market price and the marginal social cost of production. This correction would ensure that the monopolistic firm produces the quantity that maximizes social welfare, taking into account the costs and benefits to society as a whole.
In terms of interested parties, the monopoly firm would obviously support the policy as it would receive financial assistance and be able to increase its profits. The consumers of the monopoly's products would also benefit from the policy due to increased supply and lower prices, which could potentially improve their overall welfare.
However, other taxpayers would bear the burden of financing the per-unit subsidy. These taxpayers, who are not directly involved in the monopoly or its consumers, may oppose the policy as it involves using public funds to support a private entity. They might argue that these funds could be better utilized for other public services or redistributed to benefit a wider range of individuals.
Overall, the policy of using a per-unit subsidy to encourage a monopoly to produce the socially efficient quantity would be supported by the monopoly firm and its consumers. On the other hand, other taxpayers might oppose the policy due to concerns about the allocation of public funds.