Assume that the government levies a one-time-only tax on oil companies equal to a proportion of the value of the company's oil reserves. According to the neoclassical model, if firms face no financing constraints and also believe the tax will not be repeated, the effect of this tax on investment by these firms will be to:

Question

Quizplus · Accepted Answer

In the neoclassical model, if firms face no financing constraints and believe the tax will not be repeated, a one-time tax on oil reserves is seen as a sunk cost and does not affect the marginal decisions about investment. The model assumes that investment decisions are based on the marginal profitability of new investments, not on sunk costs or existing capital.

Assume That the Government Levies a One-Time-Only Tax on Oil