Question: In an otherwise distortion-free, perfectly competitive economy, the production of X is monopolised and the firm producing X makes positive profits for its owners. Consider the effects on the distribution of income and allocation of resources of the following suggested actions:

(a) taxing the profits made in the production of X and distributing them to the rest of the community;

(b) subsidising the production of X so that the firm produces the level of output that would be produced by a competitive industry;

(c) a combination of (a) and (b). Which action would you prefer to see taken? Would your preference be influenced by the knowledge that the owners of the firm in question were the otherwise penniless inhabitants of an orphanage?