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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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https://brainmass.com/economics/monopolies/excess-profit-tax-532991

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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 ...

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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Price Gouging and Windfall Profits in Oil Companies

During the energy crisis of the 1970s, and again in the last 5 years, Congress bemoaned the "price gouging" and "windfall" profits of the major oil companies. In the 1970s Congress imposed an "excess profits tax" on these companies. It did not do so this time? What does this change show about how our understanding of the way the price system works to allocate resources has evolved? If "excess profits" are taxed away, where will oil companies get the money to fund new exploration and development of oil properties? Does it matter if these price increases are demand or supply induced?

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