A REEXAMINATION OF THE PRICE EFFECTS OF A UNIT COMMODITY TAX UNDER PERFECT COMPETITION AND MONOPOLY

Musgrave, in his Theory of Public Finance, argues that the price effec t of a unit tax under monopoly is one half the effect under competitio n when demand and supply curves are linear. It is shown here that this rule applies only for the constant-cost case. For an increasing suppl y (marginal cost) schedule, the effect for monopoly is smaller than un der competition, but by a factor less than 2.