WELFARE IMPLİCATİONS OF TAXES İN THE PRESENCE OF NATURAL MONOPOLİES: A THEORETİCAL STUDY

Ayşe UYDURANOĞLU (Istanbul Bilgi University)

The examples of natural monopolies are widely seen in practice. The existing of natural monopolies leads to government intervention in the economy. Government intervention is witnessed in two ways: regulator and supplier. In addition, governments can alter the quantity supplied and price charged by the natural monopolist through taxes. In the presence of natural monopolies, taxes are employed to raise revenue. In general, taxes imposed on natural monopolies can be classified as ad-valorem (VAT) and excise taxes. These taxes do not have identical effects on the prices charged and profit, thus lead to different changes in welfare loss. Especially, if the product supplied by the natural monopolist is the energy used for domestic purposes, the taxes can be rather harmful on households with low income, since these taxes are a typical example of regressive taxes. This paper aims to trace the effects of the taxes on social welfare. To do this, a micro model is constructed. First, it is supposed that the government is a regulator. Second, it is considered that the government is a supplier. In both cases, the welfare implications of the taxes are examined and compared with each other. The results generated by simulation indicate that the welfare implications of the taxes vary depending on whether the government itself is the supplier or regulator.