Impact of windfall tax on market dynamics: A Cournot oligopoly model with exogenous shocks

Abstract

This study explores the nuanced impact of windfall taxes on market equilibrium, introducing an innovative approach within the Cournot oligopoly framework. The paper uses the 0–1 test for chaos to dissect how profit taxation can stabilize market behaviors under bounded rationality. It suggests that higher taxes may prevent collusion, thereby promoting a more competitive environment. The paper demonstrates that while windfall taxes leave regular markets almost unaffected, they can protect firms in chaotic states from adverse outcomes. This research underscores the necessity for policymakers to tailor windfall tax strategies to specific market conditions, potentially driving enhanced market efficiency. Our insights advocate for the judicious application of windfall taxes, which could significantly shape future economic policies.