Imposing Tax on Economic Rents Essay Example | Topics and Well Written Essays - 500 words

Imposing Tax on Economic Rents - Essay Example 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 of producing the drug is less than the price charged for the drug. The government should impose a 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. Dominant firms in the market practice such strategies that encourage the 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.