While high transportation cost and market power are long-recognized sources of market inefficiency, their analytical relation has not been established in a developing country context. In this paper, we analyze the mechanism by which lower transportation costs increase farm prices and profits by reducing marketing costs and marketing firms' exercise of oligopsony power. We utilize a two-stage game framework to demonstrate use of an endogenous financing mechanism to generate funds to improve transportation infrastructure and derive the optimal rate of taxation to maximize producer welfare.