Imposing Tax on Economic Rents - Essay Example

Imposing Tax on Economic RentsIntroductionThis project makes an attempt to answer certain economic issues. Firstly, it discusses the effects of tax imposition on the British pharmaceutical company. Then it goes on to answer the questions of a perfectly competitive market. Finally it presents facts which prove that horizontal mergers increase the concentration ratio in the market.It is advisable to impose tax on economic rents. In this case, the British pharmaceutical company has spent several years in developing a treatment for HIV patients.

It has also incurred a lot of cost on this treatment. The company can now make significant gains by availing the security for patent rights. The company will get large amounts of economic rents as long as the patent remains. This means that the marginal cost for producing the drug is less than the price charged for the drug. Government should impose tax on the economic rent earned by the company to ensure that the successful drugs available in the market should stay in the market. But this would have certain long run consequences.

The pharmaceutical company would reduce resources for the discovery of new successful drugs. So, economic rents are phenomena in the short run. In the long run it acts as a source for rewarding risks taken in society. Thus, it holds good not only for this pharmaceutical and drug business, but also for the sports and entertainment sector.Perfectly Competitive IndustryIt is given that the perfectly competitive firm produces 2000 units per year and has total revenue of $200,000 per year. It is known thata) In a perfectly competitive market, Price=AR, i.e. Price=200,000/2000=100.b) Price=MR=AR, Therefore AR=100.c) According to the profit maximising condition, MR=MC, where MC curve is rising.

As it is given that the firm is maximising profits, MC=100.d) The long run equilibrium in a perfectly competitive market saysATC=MC, Therefore ATC=100.Horizontal and Vertical MergerDominant firms in the market practice such strategies that encourage development of an oligopolistic market structure. Mergers are the most common way to develop this structure. This refers to the process of joining of two or more firms to bring it under one single ownership or control. Mergers result in the establishment of huge corporations that operate in the market.

Thus, firms which have the prospects of raising huge capital in the market and operating successfully are deterred from entering the market. The market is already saturated with large oligopolistic firms. The two most common types of mergers are vertical and horizontal mergers. Horizontal mergers refer to the joining of those firms which have been producing and selling the same kind or similar products. An example of a horizontal merger is the joining of two daily newspapers within the same city.

Vertical mergers occur between firms which maintain a buyer and seller relationship. This usually occurs between companies operating in the same industry, but at different stages of the production process. Concentration ratios measure the percentage of total sales, revenues, profits etc. accounted for, by the largest firm in the market. Horizontal mergers are more likely to increase the concentration ratio and reduce the level of competition. It deters the entry of new firms into the market, thus increasing the relative market share of the existing firm.

ConclusionThe above explanations have depicted the manner in which mergers can increase the concentration ratio in the market. It has also showed the process by which an economy can benefit by the imposition of tax on economic rents earned by a company.BibliographyFerguson, P. R. & Ferguson, G. J. Industrial economics: issues and perspectives. NYU Press. 1994.