A Higher Corporate Profit Tax May Lead to a Welfare Improvement in a Fair Rate-of-Return Regulated Monopoly

Chin Wei Yang ; S. N. Sohng ; John A. Fox

Professor, Department of Economics, Clarion University of Pennsylvania, Clarion, Pennsylvania 16214, U.S.A., Tel: +1-814-393-2609, Fax: +1-814-393-1910 yang@clarion.edu
Professor, Department of Economics, Clarion University of Pennsylvania, Clarion, Pennsylvania 16214, U.S.A., Tel: +1-814-393-2632, Fax: +1-814-393-1910 sohng@clarion.edu
Economics Consultant, 6621 Eberlein Avenue, Klamath Falls, Oregon 97603, U.S.A. foxy@wmconnect.com1

JEL classification: L51

Abstract

Well-known in the literature, a profit tax on an unregulated monopoly will not alter the optimal position of price and output. Given that unregulated monopoly is few and far in between, it has little practical relevance. This paper presents for the first time a paradox: A profit tax can indeed alter the optimal price and output and as such may lead to a welfare improvement in the case of a rate-of-return-regulated monopoly. In addition, it does not require extraneous assumptions of increasing returns to scale and/or very convex demand curve.

Keywords:

Regulated monopoly profit tax

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