When dealing with a monopoly, why would an excise tax increase the deadweight loss?

Question

...and why does a excise subsidy reduce deadweight loss?

Answer 1

Since monopoly have full power on market so it can modify supply to almost any output.

Tax will actually reduce quantity supplied because it will increase marginal cost thus will shift MC up and consequently will lead to fall in quantity supplied, to increase in price, and will increase dead-weight loss (as any tax).

As on this image quantity with tax will be reduced from Q=3.8 (P=4000) to Q=2.1 (P=6000)

http://csob.berry.edu/faculty/economics/...

http://csob.berry.edu/faculty/economics/...

But tax subsidy will shift marginal cost down thus increasing quantity supplied and reducing price - thus will reduce dead-weight loss.

http://upload.wikimedia.org/wikipedia/en...

http://tutor2u.net/economics/content/dia...

http://www.heritage.org/Research/Taxes/i...

http://tutor2u.net/economics/content/dia...

Answer 2

When there is a monopoly involved, there is no market competition to affect profits and losses within an individual company(the monopoly is the sole company that exists at the time).  So taxes and subsidies will have more of an effect than they would otherwise.