Lecture 10: Taxation

Question 1

Comparison tax incidence in perfect competition and monopoly
Perfect competition:

Answer 1

Firms do not internalize the effect that a variation in the quantity offered in the market has on the price (given perfect competition -> all firms are price-takers)
The excise tax increases their marginal costs: in the presence of an excise tax ts, the firm does not have variations in the marginal revenue (the marginal revenue of productions and selling one more unit, will always be the market price which is taken as given by the single firm)
Viceversa, the excise tax increases the marginal costs of a firm because of the quantity sold, the firm should pay the tax ts for each unit sold

Question 2

Comparison tax incidence in perfect competition and monopoly
Monopoly:

Answer 2

The monopolistic firm internalizes the effect of a variation of the quantity offered on the market price (monopoly -> the firm is price-maker)
In the presence of an excise tax ts the monopoly firm will have a reduction of the marginal revenue equal to ts
(given constant marginal costs) the monopolistic firm will not shift completely the excise tax on consumers (as in the case of perfect competition) because it will internalize the effect of the tax shifting in terms of a lower demand and thus a lower marginal revenue