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

Chin W. Yang (), Hui Wen Cheng (), Ching Wen Chi () and Bwo-Nung Huang ()
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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

Hacienda Pública Española / Review of Public Economics, 2016, vol. 216, issue 1, 39-60

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.

Keywords: monopoly; cartel; price elasticity; unit tax; after-tax profit. (search for similar items in EconPapers)
JEL-codes: D42 H25 (search for similar items in EconPapers)
Date: 2016
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