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Excess Profit Tax

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Is it good to have an excess profit tax?
Do unexpected monopolistic profit serve any useful function in the market economy?

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Solution Summary

Is it good to have an excess profit tax? Do unexpected monopolistic profit serve any useful function in the market economy? We look at the implications of this policy and of monopolies.

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This is an interesting question - the first one touches more on policy than economics, but I'll give it a go.

In regards to an "excess profit tax," there is an economic case to be made for it usually only in one situation, that of negative externalities. That is, if a company is creating a negative externality that is allowing it to make supernormal profits but not internalize the "social" costs of that externality, a tax might be justified to help the company internalize those costs. However, setting the amount of the tax is very difficult and ...

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