Answer to Question #220789 in Finance for Mammusa

Question #220789

In an attempt to increase tax revenues, parliamentarians introduced legislation that would increase state <b><i>excise</i></b> taxes. Examine the impact of such an increase on the equilibrium prices paid and quantities consumed by consumers in markets characterized by (a) Sweezy oligopoly (b) Cournot oligopoly (c) Betrand Oligopoly (d)Determine which of these market settings is likely to generate the greatest increase in tax )

Expert's answer

An excise tax is the opposite of a lump-sum tax which allows adjustments to the company's marginal cost. When state excise taxes are raised, the company's total cost of production is likely to rise in every market structure. Therefore production costs will increase across all forms of market structure.

Following are the impact of excise tax on different market structure:

(a) Sweezy oligopoly: There will be no change in the equilibrium price and quantity supplied in this market because in this model, the marginal revenue (MR) is discontinuous for a specific range of price. If marginal cost rises within this range, it will have no effect on the equilibrium price and quantity consumed.

(b) Cournot Duopoly: Here, the rise in marginal cost will raise the price charged by the rival firm due to which the quantity supplied in the equilibrium will fall. So, this will raise the equilibrium price.

(c) Bertrand oligopoly: In this market structure all firms are engaged in price competition. Firm charges price equal to the marginal cost. If marginal cost will rise, the price of the product will also rise. Therefore, the excise tax will rise the marginal cost of the firm due to which the equilibrium price will rise and quantity will fall.

In Bertrand oligopoly, the tax revenue will be higher because the rise in excise tax will raise the price level by same amount.

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