Surprise Price Shifts, Tax Changes and the Supply Behaviour of Resource Extracting Firms

Hans-Werner Sinn, Ngo Van Long

Australian Economic Papers 24, 1985, S. 278-289.


It is shown that a surprise increase in the current price (due to, say, a change in the tariff rate) may cause a resource firm to increase or decrease its current rate of extraction, depending on its expectation of future changes in the price. The key parameters are the rate of price change in the absence of the surprise shock, the rate of interest, and the rate of change of the tax rates.