The problem below asks about the oil price increase from 1973-1980. We have also
ID: 1217113 • Letter: T
Question
The problem below asks about the oil price increase from 1973-1980. We have also seen this in 2005 and 2010, although not as dramatic a price increase. Please answer the questions in this problem. Discuss. Problem: When oil prices increased 10 fold during the 1973-80 energy crisis, many oil companies made huge profits. During this energy crisis, Congress considered imposing an “excess profits” tax on oil companies. Do unexpected monopolistic profits serve any useful function in a market economy? (Hint: Could additional oil revenue be used to explore and develop new oil fields?)
Explanation / Answer
Unexpected monopoly profits can be useful in further investment in a market economy. Higher profit implies higher savings and investments. With higher profits, producers can buy new technology of oil extraction and can extend its stock of oil (via import or by exploring and developing new sources). In adition, it will increase the wages of workers which will boost demand in the economy.
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