Regulating a Monopolist without Subsidy

We study monopoly regulation under asymmetric information about costs when subsidies are infeasible. A monopolist with privately known marginal cost serves a single product market and sets a price. The regulator maximizes a weighted welfare function using unit taxes as sole policy instrument. We identify a sufficient and necessary condition for when laissez-faire is optimal. When intervention is desired, we provide simple sufficient conditions under which the optimal policy is a progressive price cap: prices below a benchmark face no tax, while higher prices are taxed at increasing and potentially prohibitive rates. This policy combines delegation at low prices with taxation at high prices, balancing access, affordability, and profitability. Our results clarify when taxes act as complements to subsidies and when they serve only as imperfect substitutes, illuminating how feasible policy instruments shape optimal regulatory design.

💡 Research Summary

This paper investigates optimal regulation of a monopoly when the regulator faces asymmetric information about the firm’s marginal cost and is prohibited from using subsidies. The setting follows the classic Baron‑Myerson (1982) framework: a single‑product monopolist privately observes its marginal cost c (drawn from a known distribution F) and chooses a posted price p. Consumer demand is given by a strictly decreasing inverse demand function P(q). The regulator can only employ a non‑negative unit tax τ(p) that raises the consumer price to p + τ(p). The regulator’s objective is a weighted welfare function W = CS + αΠ, where CS is consumer surplus, Π is firm profit, and α∈