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Saturday, November 9, 2019

40+ most useful Shortcuts for Microsoft Word


See it here and experiment it in your PC

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Monday, October 28, 2019

NRB Preparation (MCQ for Economics)

Saturday, October 26, 2019

Major Highlights of Budget 2076-77

Budget 2076-77 is an expansionary budget, which was presented by Finance Minister Dr. Yubraj Khatiwoda on 15th Jestha 2076. This budget aims to achieve an economic growth rate of 8.5%, inflation target at 6%, and employment generation for 5 lakhs Nepalese by the end of the FY 2076-77.
budget 2076-77

Objectives, and Policies and Programs

  1. The major objectives of Budget 2076-77 are
  • Uplift of living standard,
  • Economic growth backed by social justice, and
  • Economic, physical, and social infrastructure development with an aim to upgrade to a middle-income country by 2030, and to build the foundation for the prosperous socialism-oriented economy.
  1. Major Policies, Programs, and Procedures to achieve the objectives are
  • Eradication of absolute poverty, and rapid uplift of living standard of marginalized sectors, groups, and community with prior focus on social security,
  • Enhancement of productive capacity, domestic capital formation through a transformation of social, local, and cooperative sectors,
  • Quality education, health facilities, drinking water; economic infrastructure development for agriculture, industry, tourism, and the like,
  • Rule of law, the effectiveness of public services, good governance backed by accountability and active public participation.

Revenue Source Identification

  • Government revenue: RS. 9 Kharba 81 Arba 13 Crores 83 Lakhs
  • Foreign Grants: RS. 57 Arba 99 Crores 55 Lakhs
  • Foreign borrowing: RS. 2 Kharba 98 Arba 83 Crores 33 Lakhs
  • Domestic borrowings: RS. 1 Kharba 95 Arba
budget 2076-77

Expenditure Allocation

  • Budget 2076-77 stands at RS. 15 Kharba 32 Arba 96 Crores 71 Lakhs, which is 28% higher than the Budget 2075-76.
  • Current Expenditure amounted to RS. 9 Kharba 57 Arba 10 Crores 14 Lakhs (62.4%)
  • Capital Expenditure amounted to RS. 4 Kharba 8 Arba 59 Lakhs (26.6%).
  • Financial Expenditure amounted to RS. 1 Kharba 67 Arba 85 Crores 98 Lakhs (11%).
budget 2076-77

Budgetary Projections

  • The economic growth rate projected at 8.5%.
  • Employment prospects to 5 Lakhs citizens.
  • Inflation target at 6%.

Revenue

  • Income tax exemption range increased to Rs. 4 Lakhs for Individual and Rs. 4.5 Lakhs for a couple.
  • Tax exemption during the process of merger of Banking and Financial Institutions.
  • VAT exemption in accident and health insurance.
  • Capital Gain Tax (CGT) in the share market is decreased to 5%
  • CGT in Real Estate is decreased to 5% (sub-metropolitan) and 10% in (metropolitan)
  • Government staff salary for gazetted officers and non-gazetted officer to be increased by 18% and 20% respectively and all other incentives and facilities are kept unchanged

Central, State, and Local Level

budget 2076-77
  • Equalization grant to provinces amounting to Rs. 55 Arba 30 Crores and Rs. 89 Arba 95 Crores to local bodies.
  • Conditional grant to provinces amounting to Rs. 44 Arba 55 Crores, and RS. 1 Kharba 23 Arba 87 Crores.
  • Expected revenue sharing of Rs. 1 Kharba 30 Arba 89 Crores in Provinces and Local levels.
  • Equitable grant for provinces and local level amounting to Rs. 10 Arba.

Major Policies for the Fiscal Year 2076-77

  • 1 Kharba 63 Arba 76 Crores for Education, Science, and Technology.
    • Free education up to secondary level; establishment of an informal school for students unable to join regular schooling
    • Announcement of ‘Literate Nepal’ and ‘Literacy Campaign’. 70 districts to be fully literate by the end of fiscal year 2076/77.
    • Establishment of President Educational Improvement Fund to uplift the quality of public schools. A decade lasting from 2076 to 2085 has been declared as the decade of ‘Improving Quality of Education in Public School’.
    • 8 Arba 53 Crores for Construction of 300 additional school building.
    • 3 Arba 19 Crores for School Level Scholarship.
    • 1 Arba 50 Crores grant for training and development of volunteering-teachers.
    • 2 Arba 21 Crores for quality improvement of study materials such as books in order to increase the effectiveness of education.
    • 5 Arba 95 Crores for a day-lunch facility to schooling children in Public Schools.
    • 1 Arba 10 Crores for the establishment of Madan Bhandari Science and Technology University.
  • The total budget for the Health Sector amounted to Rs. 68 Arba 78 Crores.
    • 2 Arba 20 Crores grant for the cure of 8 severe diseases to destitute citizens.
    • 1 Arba 82 Crores for the cure of Tuberculosis, AIDS, and other sexually transmitted diseases.
    • 5 Arba 57 Crores for the Hospital under construction.
  • The total budget allocated for Drinking water and Sanitation amounted to Rs. 43 Arba 46 Crores.
    • 7 Arba 39 Crores for Melamchi Drinking Water Project.
  • Budget allocation for Labour and Employment stands at Rs. 7 Arba 14 Crores.
  • 5 Arba 1 Crores for Prime Minister Employment Program.
  • Total budget allocation for Social Security amounted to RS. 64 Arba 50 Crores.
    • The Elderly Allowance has been increased from Rs. 2000 to Rs. 3000.
    • Allowances to disabled, differently abled, single woman, and endangered indigenous groups have been increased by RS. 1000.
    • Budget allocation for Women, Children, and Senior Citizen amounted to Rs. 78 Crores.
  • Total budget allocation for development of Agriculture and Animal farming amounted to Rs. 34 Arba 80 Crores.
    • 8 Arba 10 Crores for Prime Minister Agriculture Modernization Project.
  • Budget allocation in the Irrigation Sector stands at Rs. 23 Arba 63 Crores.
  • 5 Arba 73 Crores budget allocation for construction of dams in rivers such as Koshi, Narayani, Karnali, and so on.
  • 15 Arba 49 Crores for Forestry and Environment.
  • Budget for Land management and Cooperative sectors amounted to RS. 7 Arba 69 Crores.
  • Budget allocation for Tourism stands at Rs. 22 Arba 68 Crores.
  • Total budget allocation for Industry, Commerce, and Supplies stands at 11 Arba 74 Crores.
  • Total Budget allocation for Energy Sector stands at RS. 83 Arba 49 Crores.
  • Budget allocation for Road, Rail, and Water Transportation infrastructure development stands at Rs. 1 Kharba 63 Arba 52 Crores.
    • Budget for transportation management stands at RS. 1 Arba 53 Crores.
  • Budget for accommodation, building, and urban development stands at Rs. 40 Arba 73 Crores.
  • Budget for Earthquake Reconstruction stands at Rs. 1 Kharba 41 Arba.
  • Budget allocation for Local Infrastructure and Airway Infrastructure amounted to Rs. 37 Arba 80 Crores.
  • Budget allocation for Youth and Sports stands at Rs. 3 Arba 99 Crores.
  • “Open Bank Account” Campaign and ambitious aim to have a bank account of every Nepali Youth.
  • Encouragement of mobile, internet, and branchless banking so that rural area can have easy access to banking facilities.
  • Priority for the use of cards and the internet to make and receive payments.

Articles related to Banking

Online Materials

Tuesday, May 21, 2019

9 Major Amendments in NRB Directives 2075

Background


Nepal Rastra Bank (NRB) has issued Unified Directives 2075 on 20 Bhadra 2075 for A, B, and C class licensed financial institutions. The directive covers amendments and circulars issued by NRB till Shrawan end 2075.

9 Major Amendments in NRB Directives 2075


Amendments in NRB Directives include the amendment in the categorization of loan scope pf Licensed 'C' class financial institutions, a limit on issue of debenture and format of NFRS based financials, etc. Detailed amendment in the directive as issued by NRB can be accessed through the following points:

  1. Change in the category of loan:
CategoryAs per Unified Directive 2074 As per Unified Directive 2075
Pass (1%)-  Not expired, or

-  Overdue up to 3 months
-  Not expired, or

-  Overdue up to 1 month
  1. Licensed ‘C’ class financial institutions will now be able to provide an overdraft loan.

  2. Licensed ‘C’ class financial institutions can also purchase debenture and other instruments issued by the NRB.

  3. The loan limit for the loans against inaccessible agricultural land has also been increased to NPR 2 million from NPR 1 million.

  4. NRB has discarded the Financial Revival Fund. Similarly, banks cannot capitalize on interest accrued in the grace period, whereas in the case of national priority projects, the BFIs can capitalize on the interest after taking prior approval from NRB.

  5. Prior approval of NRB is required to include Bargain purchase gain arising on mergers and acquisitions in Common Equity Tier 1 Capital.

  6. Through an amendment in Unified Directive 2075, lending to firms and companies where CEOs and managerial level staff have a financial interest are prohibited. A financial interest is defined in BAFIA 2073 as shareholding of 10% or more directly or indirectly. The earlier directive permitted loans to be extended where the above persons had less than 50% holdings in such entities.

  7. The threshold to issue debentures has been enhanced to 100% of core capital by ‘A’ and ‘B’ class financial from the existing 50% with necessary approval from NRB.

  8. NRB vide its circular no 4 dated 32 Ashad 2075 issued format for preparation of NFRS based financial statements. In the revised directive, there have been few amendments in the format on Disclosure for the First-time adoption of NFRS, Segment Reporting and additional details to be covered in the disclosure of Capital Management.
Other Resource


Wednesday, April 17, 2019

Equilibrium and Stability Test [11 diagrams]

Learning Objectives

  • Equilibrium: Meaning and Definition
  • Disequilibrium and Automatic Correction Mechanism
  • Stability Test
    • Excess Demand Approach to Stability Test

Equilibrium

Equilibrium or Market Equilibrium is the state of stability in which all significant market factors remain more or less constant over a period, and there is little or no inherent tendency for change. It is also the point where the demand and supply forces for a product interact with each other, which determines the equilibrium price and quantity of that product.
According to N. George Mankiw (2009), "At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell."
The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the
market has been satisfied: Buyers have bought all they want to buy and sellers have sold all they want to sell.
The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand. The market forces automatically bring the economy to the equilibrium, so some deviation in an economy temporality affects the stability of the equilibrium. To understand this concept, let us consider a figure.
equilibrium of supply and demand
Figure 1 presents the equilibrium of demand and supply for Ice-cream cones. The intersection of the demand and supply curves determines the equilibrium for the ice-cream cones. Thus, the equilibrium quantity is at '7' and the equilibrium price is at '$2'. To check whether this equilibrium is stable or not, let us consider Figure 2.

Disequilibrium and Automatic Correction Mechanism

disequilibrium in the market
In Figure 2, the left figure shows excess supply and the right figure shows the excess demand. In the left figure, the excess supply creates competition among the firms' to sell their product. Since there is an abundance of Ice-cream cones in the market, the bargaining power of the buyer is also high. So, the competition among the sellers and the rising bargaining power of the buyers pull the price down to '$2' from '$2.5'. Eventually, the price and quantity of ice-cream cone return back to equilibrium.
Similarly, in the right part of figure 2, there is excess demand for ice-cream cones. The excess demand will pull the price down to '$1.5'. There is a shortage of ice-cream cones in the market at price  '$1.5'. The shortage of ice-cream cones raises the bargaining power of the supplier; also consumers compete to purchase the ice-cream cone by paying more for it. Eventually, the price of the ice-cream cone moves up to '$2' and quantity turns up at '7 units'. Thus, the market forces automatically bring the price and quantity of ice-cream cones at equilibrium.

Stability Test

The existence, uniqueness, and stability of an economy depends upon the nature of demand and supply curves. The demand and supply curve must intersect with each other for the existence of equilibrium. Hence, the interaction of demand and supply curve is the prerequisite for the market equilibrium.
The uniqueness of the equilibrium depends upon the number of times the demand and supply curve intersects. If the demand and supply curve intersect more than ones, then the equilibrium is not unique.
Finally, the stability of an economy depends upon the slope of the demand and supply curves. Existence and uniqueness of equilibrium is the fundamental requirement for the stability of equilibrium. Further, the stability of equilibrium depends upon the slope of demand and supply curves. The equilibrium is stable if the slope of the demand curve is less than the slope of the supply curve. In other words, if the falling demand curve intersects the rising supply curve, then the equilibrium is stable as in Figure 1 and Figure 2.
stability test of equilibrium
Figure 3 clearly illustrates the existence, uniqueness, and stability of equilibrium. In Figure 3(A), the supply curve cuts the demand curve from below at a single point, so the equilibrium is unique and stable. Figure 3(B) illustrates the unique but unstable equilibrium as the supply curve cuts demand curve from above at a single point. Figure 3(C) has multiple equilibria since the demand curve cuts the supply curve at more than one point. Finally, Figure 3(D) depicts the inexistence of equilibrium.

Excess Demand Approach to Stability Test

Excess demand is simply the difference between quantity demanded and quantity supplied at the given price level. if the excess demand is greater than 0, then it is called positive excess demand. The excess demand of less than 0 is called negative excess demand.
Excess Demand = Quantity Demanded - Quantity Supplied
We can use the excess demand approach to determine the existence, uniqueness, and stability of equilibrium.
excess demand approach to equilibrium stability
Figure 4 is the replication of Figure 3 but in terms of excess demand approach. In Figure 4(A), the equilibrium is stable because the slope of the excess demand curve is negative. Figure 4(B) has positively sloped excess demand curve, so the equilibrium is unique but is unstable. 'Multiple equilibria' is in Figure 4(C), where excess demand curve cuts price axis more than ones. Finally, In Figure 4, there is no existence equilibrium as excess demand curve fails to cut the price axis.
Now, let us draw a simple conclusion, the equilibrium is unique and stable if:
  • The demand and supply forces intersect with each other at only one point
  • The slope of the demand curve is less than the slope of the supply curve

Online resources related to this post

Meaning of Equilibrium
Economic Equilibrium

Our Post related to Economics

Subsidy: A Complete Economic Analysis
Tax: Concept, Dead-weight loss, and implications
Elasticity and Slope: A critical analysis

Suggested Readings:

Ahuja. H.L. (1970). Advanced Economic Analysis: Microeconomic Analysis. New Delhi: S. Chand & Company Pvt. Ltd.
Kutosoyiannis, A. (1979). Modern Microeconomics. Houndsmill: Macmillan Press Ltd.
Mankiw, N.G. (2009). Principles of Microeconomics. Mason: South-Western Cengage Learning
Varian. H.R. (2010). Intermediate Microeconomics - A Modern Approach. W W Norton & Company: New York.

Sunday, April 14, 2019

Subsidy: A Deeper Analysis with 6 Figures

Learning Objectives

  • Subsidy: Basic Concept
  • Subsidy and Dead-weight Loss
  • Analysis of consumer surplus and producer surplus with subsidy
  • Elasticity and Subsidy

Subsidy: Basic Concept

A subsidy is a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low[1]. It is a negative or reverse tax. Instead of collecting money in the form of a tax, the government gives money to consumer or producers. Governments generally provide it to those industries that produce socially desirable goods and/or services.
Subsidized goods and/or services are sold at a lower price in the marketplace, which benefits the buyer, and on the other hand, lower cost of production keeps suppliers in better off position. Hence, it is the difference between the price paid by the buyer and the cost incurred by the supplier.
the cost of subsidy
In the figure, X-axis measures Quantity and Y-axis measures Price. Initially, the firm was at equilibrium at E with Quantity 'Qe' and Price 'Pe', where the Demand curve (D) and Supply curve (S) intersected with each other. When the government provides a subsidy to the firm, the supply curve shifts from 'S' to 'Ss'. The shift in the supply curve will shift the equilibrium position of the firm from 'E' to 'E1'. The quantity a with a subsidy is 'Qs', which is greater than 'Qe'. Similarly, the cost of a subsidy is obtained by multiplying the 'quantity' of goods and/or services produced and the per unit of subsidy. The portion in the 'sky-blue' color is 'the cost of the subsidy'.

Subsidy and Dead-weight Loss

A subsidy is the transfer payment by the government to the consumers and producers for the production of socially beneficial goods and/or services. It provides an incentive to the producer to produce more as it reduces the cost of production and it provides an incentive to the buyer as it increases the purchasing power of the consumer. As a result, it increases the volume of production of goods and/or services, which results in wasteful trade. Hence, the excess production that is not desired by society results in a dead-weight loss. The dead-weight loss due to subsidy can be illustrated by the figure.
subsidy and dead-weight loss
Figure 2 clearly presents the dead-weight loss resulted due to the subsidy. As the supply curve shifted from S to SS, the production increased from Qe to QS. Due to the impact of subsidy, the price for the buyer has decreased to PB and the price to the supplier has increased to PS. On those additional units, the cost to the suppliers supplying those units exceeds the value to demanders of those units.
In other words, at Qs, the benefit the buyer will derive is less than the price the supplier is willing to accept. Hence, the portion in the red color is the dead-weight loss. We will deal with why the red portion in Figure 2 is dead-weight loss in the next section.

Analysis of consumer surplus and producer surplus with subsidy

Consumer surplus is the difference between what the producer is willing to charge for a good and the actual payment made by the buyer.
According to Marshall (1890), "Excess of the price that a consumer would be willing to pay rather than go without a thing over that which he actually pays."
Producer surplus is the difference between the price of the product or the buyer's payment for the payment and the marginal cost.  There is a trade-off between consumer surplus and producer surplus, that is, if a producer is able to charge a higher price to the consumer, then producer surplus exceeds consumer surplus, else the consumer surplus exceeds producer surplus.
consumer and producer surplus with subsidy
Figure 3 clearly illustrates the consumer and producer surplus associated with the subsidy. The blue color in the left is the consumer surplus and the area in purple color in the right figure is the producer surplus. So, the subsidy increases both consumer surplus and the producer surplus.

Elasticity and Subsidy

Elasticity has a negative association with the subsidy. The higher elasticity of supply, the lower benefit of subsidy to the supplier and vice-versa. In tax, elasticity is 'Escape', but it is just reverse in subsidy. The inelastic supply signifies that there are very few suppliers. To understand it, let us move to perfect competition.
We often wonder, why is the demand curve of a firm in perfect competition is horizontal or perfectly elastic? The simple answer is 'the presence of a large number of buyers and sellers'. Likewise, inelastic supply curve implies that there are few sellers in the market. So, the few sellers can enjoy more portion of the subsidy. But in case of a tax, few sellers shall bear a significant amount of tax, mean that the per-head tax for an individual seller is high.
Benefit to consumers and producers of subsidy based on elasticity
Figure 4(A) and Figure 4(B) depicts why elasticity matters. If the supply curve is elastic keeping the elasticity of demand constant, then the firms derive more benefit from the subsidy, which is apparent through Figure 4(A). Likewise, if the supply curve is inelastic keeping the elasticity of demand constant, then the firms derive less benefit from the subsidy as in Figure 4(B).
Hence, the distribution of benefit from the subsidy among the producer and the consumer depends on the elasticity of demand and supply. 'Inelastic' derives more benefit from the subsidy.

Watch out this video


End Notes

[1] Oxford Dictionary. (2019). Subsidy. Retrieved from https://en.oxforddictionaries.com/definition/subsidy

Our articles related to Economics

Difference between Economic and Econometric Model
Models in Economics: Meaning, Importance, and Limitation
Tax: Concept, Dead-weight loss, and implications

Suggested Readings:

Ahuja. H.L. (1970). Advanced Economic Analysis: Microeconomic Analysis. New Delhi: S. Chand & Company Pvt. Ltd.
Kutosoyiannis, A. (1979). Modern Microeconomics. Houndsmill: Macmillan Press Ltd.
Varian. H.R. (2010). Intermediate Microeconomics - A Modern Approach. W W Norton & Company: New York.

Discuss your questions and confusions with us.



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Friday, April 12, 2019

Tax: A deeper analysis with 9 figures

Tax in Economics


Basic Concept


Tax is a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions[1]. The cost of goods and services increases with the levy of tax; consequently, the quantity demanded of the goods and services fall.

Indirect tax is the tax levied on the goods and services, and the impact and incidence of the indirect tax fall on different parties, means, the burden of tax can be shifted to other person or party. The ability to shift the burden of tax depends on the elasticity of demand and supply. Elasticity is 'Escape', that is, if the demand is elastic (keeping elasticity of supply constant), then the consumers escape from tax burden and vice-versa.


Tax and Dead-weight loss


Deadweight loss is the loss in total welfare as a consequence of allocative inefficiency. Deadweight loss results if the price of a commodity is not identical to the marginal cost. A deadweight loss is a loss in producer and consumer surplus due to a socially inefficient level of production resulting from one or more market failures. Thus, Deadweight loss occurs due to the monopoly power of the firm, taxes, and subsidy by the government, externalities, asymmetric information and so on. The deadweight loss can be escaped entirely if the economy is perfectly competitive, else there is no escape from the deadweight loss.

consumer surplus, producer surplus, dead-weight loss and Tax

In the figure, X-axis measures quantity and Y-axis measures price. Initially, the equilibrium was at ‘E’ with quantity ‘Qe’ and Price ‘Pe’. This level of price and quantity is the socially optimal price and quantity. When the government levies tax, the supply curve shifts from ‘S’ to ‘ST’. The shift in supply curve shifts the equilibrium of the firm from ‘E’ to ‘E1’.

The new consumer surplus is a portion in blue color; the producer surplus is the portion in grey color; the tax is the portion in green; the dead-weight loss is the portion in the red color. Thus, the tax reduces fruitful trade. PB is the price that the buyer will pay, and Ps is the price that the seller will receive. The difference between PB and PS is the tax. Video by ,strong> Marginal Revolution University>




Types of tax in Economics


In Economics, there are three types of tax. They are a lump-sum tax, profit tax, and specific tax.

The lump-sum tax has no impact on the marginal cost, so the firm’s profit-maximizing position [MR = MC] is unaltered. The lump-sum tax is like the fixed cost, so it affects the total cost, not the variable cost.

Similarly, the profit tax has no impact on the marginal cost, so the firm’s profit-maximizing position [MR = MC] is unaltered. Like a lump-sum tax, profit tax acts like the fixed cost, so it affects the total cost, not the variable cost.

Specific tax is the per-unit tax levied on the goods and services. It is proportional to the particular quantity of a product sold, regardless of its price. For example, the Government of Nepal announced to levy Rs. 0.25 tax on each stick of cigarette [2] is an example of a specific tax. Unlike, lump-sum tax and profit tax, the specific tax affects the marginal cost of the product. Thus, the profit maximization position [MR = MC] of the firm is affected. The firm has an ability to shift the burden of tax based on the elasticity of demand and supply of the products.


Specific Tax in Perfect Competition


In perfect competition, the price and the quantity are determined by the market forces, that is, the interaction of demand and supply. If a tax is levied on the product, then the supply curve will shift to left, which changes the profit-maximizing price and quantity of the product. The ability to shift the burden of tax depends on the elasticity of demand and supply. If the supply curve is elastic in comparison to the demand curve, then the consumers shall bear an extra burden of the tax, and vice-versa. We will use figures to depict this phenomenon.

tax in perfect competition and elasticity

In the figure, if the supply is inelastic then the producer is able to shift a small portion of the tax burden to the consumers, as shown in Figure 1(A). Similarly, if the supply curve is relatively elastic, then the producer is able to shift a certain portion of the tax burden to the consumers, as shown in Figure 1(B). If the supply curve is perfectly elastic, then the producer is able to shift the entire tax burden to the consumers. Likewise, if the supply curve is downward sloped, then the price of the product increased by '∆P3' and the specific tax by 'ab' in Figure 1(D), and ∆P3 > ab.

Thus, elasticity is 'Escape'. Keeping the elasticity of demand constant, the increase in the elasticity of supply puts suppliers in better-off. The ability of the supplier to shift the tax burden increase with the rise in the elasticity of supply.


Specific Tax in Monopoly


In a monopoly, monopolist determines the price and the quantity not by the market forces. The monopolist faces downward-sloping marginal revenue and average revenue as it can control either price or quantity. The supply curve shifts to left with levying of tax, which changes the profit-maximizing price and quantity of the product. The ability to shift the burden of tax depends on the elasticity of demand and supply. If the supply curve is elastic in comparison to the demand curve, then the consumers shall bear an extra burden of the tax, and vice-versa.

tax in monopoly and its economic impact

The figure illustrates that the elasticity of supply is the factor that affects the respective burden of the tax. The producer is unable to shift the tax burden with inelastic supply in the figure. With perfectly elastic supply, the monopolist is able to shift a significant portion of the tax burden onto consumers. Figure 2(B) clearly presents this phenomenon.


Perfect competition vs Monopoly


A perfectly competitive firm can shift the entire tax burden onto the consumers if its supply curve is perfectly elastic. But the monopolist, despite the perfectly elastic supply curve, cannot shift the entire tax burden on its consumers. This is due to downward-sloping marginal revenue and average revenue facing the monopolist.

tax in perfect competition and monopoly

The figure presents the difference between perfect competition and monopoly. The monopolist obtains its profit-maximizing price and output at the point of intersection between marginal revenue and marginal cost. Conversely, the competitive firm obtains its profit-maximizing price and output at the point of intersection between demand and supply curves. Such differences in the profit-maximizing position create differences in the ability to shift the tax burden onto consumers. Given the perfectly elastic supply, the competitive firm shifts the entire tax burden onto consumers; but the monopolist fails to do so. To understand this phenomenon, refer to Figure 1(C) and Figure 2(B).


End Notes


[2] Budget of Nepal - 2075/76
[1] Oxford Dictionary. (2018). Tax. Retrieved from https://en.oxforddictionaries.com/definition/tax

Kutosoyiannis, A. (1979). Modern Microeconomics. Houndsmill: Macmillan Press Ltd.


Our other articles on Economics


Subsidy: A Deeper Analysis with 6 Figures

Equilibrium and Stability Test [11 diagrams]

Price and Output Determination in Perfect Competition

Suggested Readings:


Kutosoyiannis, A. (1979). Modern Microeconomics. Houndsmill: Macmillan Press Ltd.