Joint Products and a Positive Response to a Profit Tax

Abstract

It is shown that rather than having a neutral (in the short run) or negative (in the long run) effect on output, a profit tax can, with joint products, increase a profit-maximizing firm's output. As counterintuitive as this result appears initially, it is a straightforward implication of joint products.

Joint Products and Responses To a Profit Tax: the Case of Endogenous Cost Allocation

“…That is, Our analysis also adds a little insight into Kreutzer and Lee's (1987) article. The denominator of in their equation (6) is the second derivative of the joint profit with respect to the joint output.…”

“…But for the ease of comparison with Kreutzer and Lee's (1987) work, I still use mutton, wool, and sheep in our analysis. Assume that the firm has a monopoly in selling mutton but sells wool on a competitive market.…”

“…The first order condition is Comparing this equation with (5) of Kreutzer and Lee (1987), the first three terms are gasically the same, except that the coefficient of the second term is a function of output (M). Our method of cost allocation adds the fourth term on the left-hand side of the equation (5).…”

“…With the physical quantities method, joint costs assigned to products are based on a physical measure such as volume or weight. Basically, Kreutzer and Lee (1987) use the physical quantities method to allocate joint costs. However, there are many cases in which the physical quantities method will not accurately reflect economic values.…”

“…First, I examine the firm's output decision by endogenizing the allocation of the joint costs, where the net realizable value method is appropriate. Second, I utilize the second order condition, which appears to be irrelevant in Kreutzer and Lee's (1987) article.…”