Monopoly Profit Tax Shifting Explained

A tax specifically imposed on monopoly profits has unique characteristics regarding tax shifting.

Reasoning:

• Monopoly profits are the excess profits earned by a monopolist due to their market power, calculated after all costs are covered.
• This type of tax is levied on the profit figure itself, which is determined *after* the monopolist has set the price and output levels to maximize their earnings (where Marginal Revenue = Marginal Cost).
• Because the tax is a share of the profit already realized, it does not directly alter the monopolist's cost structure or market demand.
• Consequently, the monopolist cannot adjust their price or output to pass the tax burden onto consumers (forward shifting) or input suppliers (backward shifting).
• Any attempt to raise prices would reduce sales and potentially decrease the total profit, making the tax incidence fall solely on the monopolist.

Thus, a tax on pure monopoly profits cannot be shifted and is fully borne by the entity holding the monopoly.