Both advalorem and specific taxes can be imposed on the monopolist

Advalorem Tax- Is a tax levied according to the value of the goods produced regardless of the quality of output. Imposition of this tax on the monopolist becomes a fixed cost of production since it is independent of the level of output.  The average cost therefore increases while the marginal cost remains unaffected reducing the monopolist's profits.

Figure 2.38 Effect of advalorem tax

 

Before taxation, the monopolist is earning super normal profits equivalent to area OCPAB.  After imposition of an advalorem tax, the AC curve shifts to AC₁, reducing the monopolist's profits from OCPAB to OC₁PAE.  The monopolist will produce output OQ selling it at price OP and cannot reduce the output because he would lose.

Specific Tax:  This is a tax levied per every unit of output.

This tax therefore increases and shifts upwards both the marginal cost and average cost curves of the Monopolist.

        Effect of a specific tax

 

Before the imposition of a specific tax, the monopolist earns super normal profits equivalent to OCPAB by producing output OQ at a cost OC and selling it at a price OP.

After taxation, both the marginal cost and average cost shift upwards to MC1 and AC1 respectively. Because of the increase in cost from OC to OC1 the monopolist reduces output from OQ to OQ₁. He therefore earns profits equivalent to OC1 P1 DE which are smaller than the before taxation i.e. OCPAD. This type of tax though intended to reduce the monopolist's abnormal profits leads to reduction in supply and increase in price which also affect the consumer.

Anti-monopoly (antitrust) Legislation, These are laws enacted to control Monopoly. Such laws could prohibit monopolization and collusion among firms. In some countries, this is in form of what is called monopoly restrictive trade practices act (MRTPA)

Subsidization:  New firms could be subsidized by government so that they can compete favourably with the large scale monopoly firms.  This breaks the monopoly status of those large monopoly firms.

Government can remove restrictions to entry into the industry to break monopoly power of some firms.  It could be through trade liberalization and privatisation

Government may encourage co-operative movements capable of competing in production fields monopolised by single firms.   Co-operatives would enable raising of funds into ventures where huge initial investment costs prevent other firms from joining

Setting the level of output to be produced by monopolists so that they do not produce at excess capacity to create artificial shortages so as to sell at high prices.  It could be done indirectly through sur tax policy

Consumer protection associations can  be established to organise consumers and protect them against monopoly exploitation.  Such associations may also set the standards for quality of output produced for consumption.

Government can also use resale price maintenance (Maintenance (RDM) as a tool of preventing over charging the final consumers of monopoly products.