<p>As you pointed out, the problem of inefficient supply by a profit maximizing monopolist can be solved via subsidizing the monopolist to increase his marginal revenue. The subsidy can be paid by the consumers or by a central government.</p>

<p>Consumers unfortunately perceive the problem as a collective action problem: The marginal utility gain from subsidizing the monopoly is much lower than the marginal welfare gain of society, making individuals reluctant to subsidize the monopoly.</p>

<p>Governments, however, can solve the collective action problem by raising a tax and thus financing the subsidy. However, governments usually do not only pursue efficiency but also interpersonal equity. If the government cannot transfer the monopolist's earnings lump sum to the consumers, then this may conflict with the goals of interpersonal equity.</p>

<p>To give a simple example: Suppose rich individual A owns a monopoly on water. There are many consumers of water who are all poor. A sets the profit maximizing price/quantity. If the government maximizes total utility and all consumers have identical concave utility functions, the government would like to impose the efficient subsidy and tax the rich individual A lump sum to finance the subsidy and possibly transfers to the poor. However, if the lump sum tax on A is not available, we are in what is called a second-best solution. In this case, it may be optimal for the government to permit some inefficiency from the monopoly rather than taxing the poor to pay for the subsidy.</p>

<p>As an aside: Most interestingly, if there is an omniscient government which maximizes social welfare and can make lump-sum transfers, then under some regularity conditions the collective action problem disappears without the government imposing the subsidy! Thus, I would have an interest to subsidize the monopoly on my own. This is because the utility possibility frontier is pushed outwards by the subsidy and the government will reimburse me lump sum for my cost.</p>

CC BY-SA 3.0
2015-11-28T04:58:51.460Z
2015-11-28T04:58:51.460Z
HRSE
<p>The people at large view monopolies as unfair market actors, and the idea of subsidizing such unfairness is the reason that real people in the current world don't want to subsidize monopolies.</p>

<p>If you're asking why economists don't advocate subsidizing monopolies, I'm actually not sure. The standard treatment of monopolies seems to lend itself to that advocation. </p>

<p>But the real reason monopoly subsidies aren't appropriate is because they're simply not necessary (and if used would almost definitely lead to more inefficiency). Price discrimination eliminates most if not all problems of inefficient allocation, since if the monopoly can price discriminate, it can set different prices such that most if not all potentially mutually-profitable trades will be made. And the monopoly has an incentive to do this because it increases their profits above setting a single price.</p>

<p>For more on this, economics PhD Stephen Shmanske wrote a paper entitled <a href="https://www.independent.org/pdf/tir/tir_10_3_02_shmanske.pdf" rel="nofollow">The Monopoly Nonproblem</a></p>

CC BY-SA 3.0
2016-03-15T18:50:37.090Z
2016-03-15T18:50:37.090Z
B T
<p>Monopolies don't maximize welfare because they set prices above the equilibrium price, leading to dead-weight loss. It is possible for the government to provide a per unit subsidy to a monopoly until the producer's marginal cost equals the consumer's marginal benefit at the monopoly's chosen quantity, which would maximize welfare. This change would increase producer surplus and consumer surplus in this market.</p>

<p>To a monopolist producer, a per unit subsidy is essentially equivalent to shifting the demand curve up by the value of the subsidy. It would be possible to shift the demand curve up until the optimal quantity produced is the higher equilibrium quantity. This requires that the subsidy provider knows the complete demand curve to set the optimal subsidy.</p>

<p>The subsidy must come from somewhere, like a tax on a different market. It seems plausible that there would be situations where even if all tax incidence fell on consumers, consumer surplus would still be greater after the subsidization. If consumers and producers are overall better off after a subsidy, why don't consumers do this without government intervention?</p>

CC BY-SA 3.0
2015-11-26T17:24:01.537Z
A monopoly's marginal cost does equal it's marginal benefit if it is maximizing profits
DornerA
CC BY-SA 3.0
2015-11-26T17:34:48.030Z
I meant that the consumer's marginal benefit equals the producer's marginal cost at the equilibrium quantity.
InquisitivePerson
CC BY-SA 3.0
2015-11-26T17:54:23.847Z
You have to be explicit about how the mechanism for consumer's subsidization works. If consumers are willing to provide such a subsidy, are they guaranteed to get the expected increase in consumer surplus? Is it possible that consumers' willingness to subsidize would harm them if the monopoly "doesn't hold up to its end of the deal"? So a short answer to your question would be: the consumers are not given the right incentive to do so.
Herr K.
CC BY-SA 3.0
2015-11-26T18:02:44.173Z
@HerrK. I think he means a marginal subsidy (x\$ / unit) which would incentivize the monopolist.
Giskard
CC BY-SA 3.0
2015-11-26T18:04:44.810Z
The total cost of such a subsidy is (under normal circumstances) larger than the resulting increase in consumer surplus. I think you could show this with a simple drawing, (elevating the demand function and $MR$) but I am not sure.
Giskard
CC BY-SA 3.0
2015-11-26T19:40:06.340Z
@denesp I don't see why that is necessarily true. For example, consider a demand function D(p) where D(p)=0 at p>3, D(p)=1 at 3>p>1, D(p)=2 at 1>p>0, and D(p)=3.5 at p<=0,  Assume marginal cost is always 0. Without a subsidy, the price is set to 3, resulting in a producer surplus of 3. Consumer surplus is 0. A per-unit subsidy of 1 is provided. Now the optimal price is 0. Producer surplus is 3.5. Consumer surplus is 4. The increase consumer surplus (4) is greater than the subsidy cost (3.5).
InquisitivePerson
CC BY-SA 3.0
2015-11-28T16:11:03.440Z
How would this work as a practical example?  Take oil which is not competitive.  You are saying we should subsidize the cost of producing oil?  My understanding of economics is the opposite.  You tax monopolies so the monopolistic "rationing" price returns its benefits to the public.  Take oil.  If the "equilibrium price" is 150 dollars a barrel and the monopoly price is 170 dollars, the government provides a 20 dollar tax.
user2662680
CC BY-SA 3.0
2015-11-28T19:57:39.450Z
@user2662680 Taxing the market would cause the monopoly to set its price higher. This is because the producer's marginal revenue falls, while marginal costs remain the same, lowering quantity at the intersection point. This means a lower total welfare, since quantity sold is now even farther from the equilibrium quantity.
InquisitivePerson
CC BY-SA 3.0
2015-11-29T00:10:06.753Z
@InquisitivePerson I don't see it.  The monopoly business was already charging what they could get away with.  They already determined that any price increase above the monopolistic price would hurt sales volume more than the corresponding markup would help.  Take an uncompetitive market like oil.  Say there there are two border states next to each other.  The monopolistic price for gas is say $2.50.  State b has a gas tax of ($0.50).  State B charges no gas tax.  the price of gas on the border will be them ($2.50).  But State B will collect taxes for the public that state B won't.
user2662680
CC BY-SA 3.0
2015-11-29T03:17:21.270Z
@user2662680 The monopoly calculates its prices by finding the point at which, as price increases, revenue falls greater than costs. With the per unit tax, the monopoly finds that, as price increases, revenue decreases more slowly because the tax has, in effect, multiplied revenues by (1-tax), leading to a higher price. The intuition behind this is that a tax basically tells the monopoly "you have to pay us extra money for every unit you produce." In your example, what I believe would happen is that once state A implements the tax, the monopoly would increase the price of oil by some amount.
InquisitivePerson
<microeconomics><monopoly><welfare-economics>
Why don't consumers subsidize monopolies?
InquisitivePerson
# Why don't consumers subsidize monopolies?

(Asked by: username_0 on 2015-11-26)

Monopolies don't maximize welfare because they set prices above the equilibrium price, leading to dead-weight loss. It is possible for the government to provide a per unit subsidy to a monopoly until the producer's marginal cost equals the consumer's marginal benefit at the monopoly's chosen quantity, which would maximize welfare. This change would increase producer surplus and consumer surplus in this market.

To a monopolist producer, a per unit subsidy is essentially equivalent to shifting the demand curve up by the value of the subsidy. It would be possible to shift the demand curve up until the optimal quantity produced is the higher equilibrium quantity. This requires that the subsidy provider knows the complete demand curve to set the optimal subsidy.

The subsidy must come from somewhere, like a tax on a different market. It seems plausible that there would be situations where even if all tax incidence fell on consumers, consumer surplus would still be greater after the subsidization. If consumers and producers are overall better off after a subsidy, why don't consumers do this without government intervention?

**Tags:** microeconomics, monopoly, welfare-economics

> **Comments:**
> **username_1**: A monopoly's marginal cost does equal it's marginal benefit if it is maximizing profits  
> **username_0**: I meant that the consumer's marginal benefit equals the producer's marginal cost at the equilibrium quantity.  
> **username_2**: You have to be explicit about how the mechanism for consumer's subsidization works. If consumers are willing to provide such a subsidy, are they guaranteed to get the expected increase in consumer surplus? Is it possible that consumers' willingness to subsidize would harm them if the monopoly "doesn't hold up to its end of the deal"? So a short answer to your question would be: the consumers are not given the right incentive to do so.  
> **username_3**: @HerrK. I think he means a marginal subsidy (x\$ / unit) which would incentivize the monopolist.  
> **username_3**: The total cost of such a subsidy is (under normal circumstances) larger than the resulting increase in consumer surplus. I think you could show this with a simple drawing, (elevating the demand function and $MR$) but I am not sure.  
> **username_0**: @denesp I don't see why that is necessarily true. For example, consider a demand function D(p) where D(p)=0 at p>3, D(p)=1 at 3>p>1, D(p)=2 at 1>p>0, and D(p)=3.5 at p<=0,  Assume marginal cost is always 0. Without a subsidy, the price is set to 3, resulting in a producer surplus of 3. Consumer surplus is 0. A per-unit subsidy of 1 is provided. Now the optimal price is 0. Producer surplus is 3.5. Consumer surplus is 4. The increase consumer surplus (4) is greater than the subsidy cost (3.5).  
> **username_4**: How would this work as a practical example?  Take oil which is not competitive.  You are saying we should subsidize the cost of producing oil?  My understanding of economics is the opposite.  You tax monopolies so the monopolistic "rationing" price returns its benefits to the public.  Take oil.  If the "equilibrium price" is 150 dollars a barrel and the monopoly price is 170 dollars, the government provides a 20 dollar tax.  
> **username_0**: @username_4 Taxing the market would cause the monopoly to set its price higher. This is because the producer's marginal revenue falls, while marginal costs remain the same, lowering quantity at the intersection point. This means a lower total welfare, since quantity sold is now even farther from the equilibrium quantity.  
> **username_4**: @username_0 I don't see it.  The monopoly business was already charging what they could get away with.  They already determined that any price increase above the monopolistic price would hurt sales volume more than the corresponding markup would help.  Take an uncompetitive market like oil.  Say there there are two border states next to each other.  The monopolistic price for gas is say $2.50.  State b has a gas tax of ($0.50).  State B charges no gas tax.  the price of gas on the border will be them ($2.50).  But State B will collect taxes for the public that state B won't.  
> **username_0**: @username_4 The monopoly calculates its prices by finding the point at which, as price increases, revenue falls greater than costs. With the per unit tax, the monopoly finds that, as price increases, revenue decreases more slowly because the tax has, in effect, multiplied revenues by (1-tax), leading to a higher price. The intuition behind this is that a tax basically tells the monopoly "you have to pay us extra money for every unit you produce." In your example, what I believe would happen is that once state A implements the tax, the monopoly would increase the price of oil by some amount.  

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## 2 answers

### Answer by username_5 on 2015-11-28. Score: 6

As you pointed out, the problem of inefficient supply by a profit maximizing monopolist can be solved via subsidizing the monopolist to increase his marginal revenue. The subsidy can be paid by the consumers or by a central government.

Consumers unfortunately perceive the problem as a collective action problem: The marginal utility gain from subsidizing the monopoly is much lower than the marginal welfare gain of society, making individuals reluctant to subsidize the monopoly.

Governments, however, can solve the collective action problem by raising a tax and thus financing the subsidy. However, governments usually do not only pursue efficiency but also interpersonal equity. If the government cannot transfer the monopolist's earnings lump sum to the consumers, then this may conflict with the goals of interpersonal equity.

To give a simple example: Suppose rich individual A owns a monopoly on water. There are many consumers of water who are all poor. A sets the profit maximizing price/quantity. If the government maximizes total utility and all consumers have identical concave utility functions, the government would like to impose the efficient subsidy and tax the rich individual A lump sum to finance the subsidy and possibly transfers to the poor. However, if the lump sum tax on A is not available, we are in what is called a second-best solution. In this case, it may be optimal for the government to permit some inefficiency from the monopoly rather than taxing the poor to pay for the subsidy.

As an aside: Most interestingly, if there is an omniscient government which maximizes social welfare and can make lump-sum transfers, then under some regularity conditions the collective action problem disappears without the government imposing the subsidy! Thus, I would have an interest to subsidize the monopoly on my own. This is because the utility possibility frontier is pushed outwards by the subsidy and the government will reimburse me lump sum for my cost.


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### Answer by username_6 on 2016-03-15. Score: 0

The people at large view monopolies as unfair market actors, and the idea of subsidizing such unfairness is the reason that real people in the current world don't want to subsidize monopolies.

If you're asking why economists don't advocate subsidizing monopolies, I'm actually not sure. The standard treatment of monopolies seems to lend itself to that advocation.

But the real reason monopoly subsidies aren't appropriate is because they're simply not necessary (and if used would almost definitely lead to more inefficiency). Price discrimination eliminates most if not all problems of inefficient allocation, since if the monopoly can price discriminate, it can set different prices such that most if not all potentially mutually-profitable trades will be made. And the monopoly has an incentive to do this because it increases their profits above setting a single price.

For more on this, economics PhD Stephen Shmanske wrote a paper entitled [The Monopoly Nonproblem](https://www.independent.org/pdf/tir/tir_10_3_02_shmanske.pdf)


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