Explain how a distorting tax can improve efficiency when there ...

[Zulu123]

Explain how a distorting tax can improve efficiency when there are already present other taxes that distort decisions as well.
 
  What will be an ideal response?

Question 2

Why is national defense better off as a natural monopoly? What other industry or service do you think should be a natural monopoly?
 
  What will be an ideal response?

[Pswine]

Answer to Question 1

By imposing a tax on one good when there are already distorting taxes on other goods this helps consumers face equal taxes on all goods. Therefore, they cannot avoid the tax by changing what they buy.

Answer to Question 2

Industries like national defense experience economies of scale. With very high fixed costs, the long-run average total cost falls as output expands. New firms in the market cannot achieve the low costs of the incumbent natural monopolist because upon entry, they are likely to split the market. Such splitting will leave each seller with much higher costs and lower profits. Drinking water, natural gas, and electricity are other examples of industries where it is efficient to have a single supplier in the market.