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A Tax Can Increase Profit of a Monopolist or a Monopoly-like Firm: A Fiction or Distinct Possibility?

Author

Listed:
  • Chin W. Yang

    (Clarion University of Pennsylvania)

  • Hui Wen Cheng

    (Ming Chuan University)

  • Ching Wen Chi

    (Ming Chuan University)

  • Bwo-Nung Huang

    (National Chung Cheng University)

Abstract

The purpose of this paper is to reexamine the long-held theory that a tax reduces profit under monop¬oly or monopoly-like market structure. To present the paradox, we expand the switching price elastic¬ity theory developed by Greenhut-Hwang-Ohta to show that the after-tax profit may very well increase in a monopoly or a tight-knit cartel. The result show that after-tax profit can actually increase in a monopoly or monopoly-like market without resorting to conjectural variation or product quality often used in oligopoly. To verify the paradox, simple numerical examples and commonly-used mathemati¬cal demand functions are employed.

Suggested Citation

  • Chin W. Yang & Hui Wen Cheng & Ching Wen Chi & Bwo-Nung Huang, 2016. "A Tax Can Increase Profit of a Monopolist or a Monopoly-like Firm: A Fiction or Distinct Possibility?," Hacienda Pública Española / Review of Public Economics, IEF, vol. 216(1), pages 39-60, March.
    • Handle: RePEc:hpe:journl:y:2016:v:216:i:1:p:39-60
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    References listed on IDEAS

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    More about this item

    Keywords

    monopoly; cartel; price elasticity; unit tax; after-tax profit.;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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