Regulation can reduce the profits of a natural monopoly by imposing a per-unit output tax (rather than directly regulating price).Such a tax would cause the monopolist's
1)average total cost curve to shift upward;
2)marginal cost curve to shift upward;
3)demand curve to shift to the left.
A)1 only
B)2 only
C)3 only
D)1 and 2
E)2 and 3

Question

Quizplus · Accepted Answer

If the government imposes a per-unit output tax on a natural monopoly, then the monopolist's marginal cost would increase by the amount of the tax. This leads to an upward shift of the monopolist's marginal cost curve (option B). Additionally, the average total cost curve would shift upward by a lesser amount because it includes fixed costs that are not affected by the per-unit tax (option A). However, there would be no direct effect on the demand curve (option C). Therefore, the correct answer is D.

Regulation Can Reduce the Profits of a Natural Monopoly by Imposing