| Abstract: |
This paper investigates the pass-through of an excise tax imposed on a
monopoly firm with constant marginal cost. The optimal price increases as tax
increases for any demand function. Tax pass-through is globally under or in
excess of 100% according as the direct demand function is log-concave or
log-convex. The analysis relies on supermodular optimization and delivers
conclusions based on minimal su¢cient assumptions in a simple, broadly
accessible and self-contained framework. Further results allow for mixed
conditions that provide precise and local determination of pass-through.
Several illustrative examples are given. Policy conclusions relating to the
relative wisdom of taxing high versus low cost monopoly firms are drawn from
the results. |