Learning Objectives:

Monopoly

LO5: Explain three grounds on which monopolies can be defended

LO6: Discuss ways that governments can change the behaviour of monopolies

CHAPTER 10

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Some options:

• Taxing the monopolist

• Government price setting

• Nationalization

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LO6

Government Control

Lump sum Profits Tax: • affects fixed cost but not variable cost

• increases average cost but marginal cost is unaffected

• output and price levels are unaffected

• lower profit (due to higher costs)

10-3© 2012 McGraw-Hill Ryerson Limited

LO6

Taxing the Monopolist

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LO6

10-4

Monopoly Sales Tax: • tax on each unit sold

• increases marginal cost

• profit maximizing point shifts

• part of the tax is shifted to consumer in the form of higher price

• lower quantity is produced

• monopolist’s profit is reduced

10-5© 2012 McGraw-Hill Ryerson Limited

LO6

Taxing the Monopolist

© 2012 McGraw-Hill Ryerson Limited

LO6

10-6

Socially Optimum Price • the price that produces the best allocation of

products (and therefore resources) from society’s point of view, that is, P MC

Fair-Return Price • a price that guarantees that the firm will earn

normal profits only, that is, where P AC

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LO6

Government Price Setting

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LO6

10-8

Self-Test

10-9© 2012 McGraw-Hill Ryerson Limited

On the graph, indicate:a) Price (PUM) and quantity (QUM) if monopolist is unregulated

b) Price (PSO) and quantity (QSO) if monopolist charges the socially optimum price

c) Price (PFR) and quantity (QFR) if monopolist charges fair-return price

LO6