The government provides patents to pharmaceutical companies that allow them to charge high prices for the drugs they develop for some years. If a company succeeds in developing an effective drug, the patent protection can result in high profits, especially because the marginal cost of drug production is low. Some propose that the government raise revenue by levying a one- time tax on these profits. Would this be an efficient way to raise tax revenue? Include in your answer the concept of the “time inconsistency of optimal policy.”
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