If the government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax, or a per-unit subsidy? Explain how this tax or subsidy would achieve the socially efficient level of output

If a monopolist is producing quantity lesser than the equilibrium level, then the government must provide a per-unit subsidy to the firm. This will encourage them to produce more as due to subsidy their cost of production will be lower. With a higher quantity and lower price, a market is able to achieve a socially efficient level of output. The monopoly firm and the monopoly?s consumer would support this policy because now they will get more quantity at lower prices. The other taxpayer would oppose this policy because the taxpayers are supposed to pay the burden of subsidy.

If a monopolist is producing quantity higher than the equilibrium level, then the government must impose per unit tax on the firm. This will increase the firm?s cost of production and therefore discourage the monopolist to produce quantity higher than the socially efficient quantity. The monopoly firm and the monopoly?s consumer would not support this policy because now they will get lesser quantity at a dearer price. The other taxpayer would support this policy because now they need not bear a large tax burden and the new tax will be imposed only on a specific group.