It is to be remembered that the monopolist has control
over the supply schedule, but not over the demand. He
will presumably fix the supply at the place where he will
receive the highest net return, which in the schedule will
be 100 units of the commodity. At this number the net
profit is $860 more than if any other number were put on
the market. Suppose, now, the government places a $2
tax upon each unit of the good produced. The monopoly
profits, after paying the tax, are shown in the last column
of the schedule. The greatest monopoly profit will now
occur when 75 units of the good are produced rather than
100. The imposition of the tax will cause a curtailment
of supply from 100 to 75, with a corresponding rise in price
from $12.75 to $15.50 per unit. In this particular instance
the price has risen by more than the amount of the tax,
even though the total returns to the monopoly are less
than before the levy of the tax.
With a different tax or a different schedule it is possible
that the price might rise because of a tax, but by an
amount less than the tax. A tax on the number of units
produced, moreover, may not affect, in the least, the sup-
ply of goods offered. It is easily possible, if the tax be
small, that the point of highest net returns will be at the
same point in the supply schedule as before the tax levy.
In such a case the tax burden is borne by the monopoly.
Net Returns or Lump Sum Tax, Taxes on a monopoly,
172 OUTLINES OF PUBLIC FINANCE
instead of being levied on each unit of goods, may be
levied on the net returns or in a lump sum. In neither of
these cases would there be any attempt to shift the tax
through a readjustment of the supply schedule. In the
above schedule suppose a 10 per cent tax has been levied
upon the net returns. The highest net returns will still
be obtained by producing exactly the same as before the
tax was levied. Ten per cent of the net return from 100
units will leave a larger amount than a 10 per cent re-
duction from any other point in the schedule.
Had the tax been a lump sum of $50 instead of 10 per
cent on net returns, the result would have been the same.
Fifty dollars taken from $880 will leave a greater amount
than if taken from any other item in the schedule, and the
monopolist will continue to produce as before the levy of
the tax. A tax upon gross receipts, however, may cause
a change in the supply schedule and at least a partial
shifting of the tax.
The method of levying a tax on monopoly-produced
goods is important, therefore, from the standpoint of
shifting and incidence. If it be the intention of the fiscal
authorities to levy a tax which has the possibility of being
shifted, then it will be placed upon the units of commodi-
ties produced, or possibly upon the gross receipts. If,
however, no shifting be desired, and it is contemplated
that the monopoly must bear the entire tax burden, the
levy will either be in lump sum or on the net returns.
Some of the practical considerations of the method of levy
will be considered elsewhere.
99. Taxes on Competitively Produced Goods Have
Varying Effects. No general conclusion can be given as
to the extent to which taxes are shifted when they are
placed upon goods which are produced under competitive
conditions. Ordinarily the tax will be shifted to some
extent, but in the process the price of the commodity may
be changed by an amount less than the tax, greater than
the tax, or by an amount just equal to the tax. The price
will change according to the different conditions of cost
of production increasing, decreasing, or constant.
Suppose the market conditions are such that each unit
of O E goods is selling at the price of O P that is, just
enough to cover the cost to the marginal producer. A tax
is placed upon each unit of goods produced, which in-
creases the cost per unit by the amount of the tax, Cc.
This will make it unprofitable for the marginal producer
to remain in the field, and fewer goods will be produced.
At the new cost the demand will warrant the production
of only O B units. As fewer goods are produced, however,
the marginal cost becomes less, and the new marginal
producer can sell at a price increased by an amount less
than the tax, and still cover his cost of production. The
new price per unit will be OP', an increase over the former
price of P P' or B' b. The tax was C c or B' b', so the in-
crease in the price was less than the tax by bb'.
Decreasing and Constant Cost. In a similar way dia-
grams could be drawn to show the effect of a tax placed
upon goods produced under conditions of decreasing and
constant costs. In case the tax is levied upon goods pro-
duced under conditions of decreasing costs, the price will
increase, but by an amount greater than the tax. The
producer will have to recoup himself for the tax, and in
addition make up for the greater cost per unit as fewer
goods are produced.
In the case of goods produced under constant costs,
since the cost of each unit is the same no matter how
many are produced, the final result of a tax will be to in-
crease the price by the amount of the tax. If competition
has not worked itself out until the selling price is equal
to the cost of production, then a tax may make no change
in price. The producer may pay the tax out of the differ-
ential above costs, and leave production as before. Here
the tax is not shifted, and the consumer is the gainer.
Ideas of justice and expediency which authorities may
hold will help to determine upon what class of goods
taxes will be levied. If it be decided that prices should be
affected as little as possible, while little consideration is
given to marginal producers, taxes will be secured from
such extractive industries as agriculture, mining, and for-
estry, because of their condition of increasing costs of
production. If it be decided that industry should be left
as intact as possible and that the consumer can bear the
price increases, then the objects of taxation will be those
produced by large-scale establishments.
100. Shifting of Taxes Is Influenced by the Elasticity of
Supply and Demand. Important conditions which in-
fluence and modify the principles of tax shifting which
have just been considered, are the elasticity of supply
THE SHIFTING AND INCIDENCE OF TAXES 175
and demand. A supply may be said to be elastic when a
small change in price would cause a perceptible change
in the amount of goods produced. If a large part of a
supply of goods were produced at practically a uniform
cost, and this were near the selling price, it would be
impossible for producers to bear an appreciable tax burden
without greatly curtailing the amount of goods produced.
If the tax could not be successfully shifted under such
conditions, the amount of goods produced would be ma-
terially lessened. If there were a substantial margin
between cost and selling price, however, the tax might be
borne by the producer, for this would create a condition
of inelastic supply.
Elasticity of Demand. Of no less importance is the
elasticity of demand. The condition of elastic demand
exists when a small change in price will cause a percep-
tible change in demand. The greater the degree of elas-
ticity the more difficult it is to shift a tax. The addition
of even a small tax to the current price, when the demand is
very elastic, will cause a perceptible falling off in the
demand for the product. Some consumers may find sub-
stitutes, while others may forgo the use of the particular
utility. The less the degree of elasticity in demand, how-
ever, the easier a tax may be shifted to the consumer. If
the product be a necessity for which there is no substitute,
then a tax, to almost any extent, might be added to the
price, and the consumer would bear it.
The effect of such shifting, however, may not stop here.
The consumer, because of the high prices which he must
now pay for these necessities, may materially lessen his
consumption of other goods. This decreased demand
will cause a lowering in their price. The burden of such
a tax then is noticed in other lines of production, for these
producers must either curtail production or accept a lower
price for their product.
Direction of Shifting. The relative elasticity of supply
and demand has an important influence in determining
176 OUTLINES OF PUBLIC FINANCE
the direction which the shifting of a tax may take. So
far the suggestion has been that taxes are shifted only
toward the consumer. This is necessarily true only when
the tax is levied upon the first stage of a productive proc-
ess, and not when it is levied on any of the intermediate
Suppose the processes in production are manufacturer,
wholesaler, jobber, and retailer, and that a tax is placed
upon the wholesaler. He wishes to shift this, and may do
it by raising his price to the jobber, who will recoup him-
self by exacting more from the retailer, who in turn will
increase the price to the consumer. He may shift the
tax, on the other hand, back to the manufacturer, in re-
fusing to pay as high a price as previously for the product.
He would pursue the first course if the manufacturer were
already selling at near the cost of production while the
demand for the product was comparatively inelastic. If
there were a wide margin between the manufacturer's
cost and his selling price, while the demand were elastic,
he would pursue the second course. When a tax is levied
on some intermediate stage of production, then, its shift-
ing will likely take the direction of greatest inelasticity.
It is entirely too much to expect that fiscal authorities
should give the principles which determine the shifting
and incidence of taxes primary consideration in the levy
of every tax. It would be well, however, for them to have
a thorough knowledge of these principles, while more
frequent attempts at their application might help to
equalize tax burdens.