Answer to Question #209126 in Economics for Tonny Taupongi

Question

Discuss the merits of a proposal that the government should impose a tax

or subsidy where a non-renewable resource is supplied monopolistically

in order to increase the social net benefit

Answer 1

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.