Tax Incidence in Dynamic Monopoly

Abstract

This paper compares the equilibria in dynamic monopoly model under different kinds and rates of taxes. We show that if profit tax is imposed, a monopolist bears all the burden of tax regardless of the rates of tax. In contrast, price tax might be shared by both the buyer and the seller and the ratio of tax burden between them depends on the type of buyer. We also show that tax incidece principle still holds which means that price and expected utilities for buyer and seller in the equilibrium do not depend on whether price tax is levied on consumer or seller. Although it is hard to generally verify the superiority of profit tax over price tax in terms of social welfare and consumer surplus, we prove it in the case when there are only two types of buyers regarding their willingness to pay for a product.