A British pharmaceutical company spent years and considerable funds on the development for a treatment for HIV patients. Now, with the protection afforded by patent rights, the company has the potential to reap enourmous gains. The government, in response, has threatened to tax away any rents the company may earn. Is this an advisable policy? Why or why not? (Hint: Contrast the short-run and long-run effects of taxing away the economic rents).

Answer 1

The government makes money immediately, but discourages future research and innovation by this company and others, thereby hurting health and the economy long term.