23.7 Business and Policy Application: Taxing Monopoly Output: Under perfect competition, we found that the economic incidence of a tax (that is, who ends up paying a tax) has nothing to do with statutory incidence (that is, who the law said should pay the tax).

A. Suppose the government wants to tax the good x, which is exclusively produced by a monopoly with upward-sloping marginal cost.

a. Begin by drawing the demand, marginal revenue, and marginal cost curves. On your graph, indicate the profit-maximizing supply point 1x M, p M 2 chosen by the monopolist in the absence of any taxes.

b. Suppose the government imposes a per-unit tax of t on the production of x, thus raising the marginal cost by t. Illustrate how this changes the profit-maximizing supply point for the monopolist.