Windfall gain

A windfall gain is a sudden or unexpected income of a large sum of money, from an unforeseen source. These gains are generally way beyond the historical norms. Windfall gains may take place due to sudden steep rise in prices of a commodity or extreme shortage of a resource, asset or product.

For an individual, windfall gain could be a sudden spike in income due to one-time events like inheritance of property, money gained on selling property when its prices increase dramatically, etc. Windfall gain may also refer to gains from winning a lottery, betting income etc.

How Windfall Gains Work?

Windfall gains usually rise because of a new regulation passed by the government, a dramatic change in market, a court order, or a sudden change in trade policy. Companies and individuals who get benefited from windfall gains usually don’t anticipate such gains but are naturally glad to receive them.

When companies get benefited from windfall gains, it may have an impact on the income of people related to the company as well. For example, many companies may choose to pass on the benefit to the shareholders by increasing dividends. Companies might also choose to use this gain to buy back its shares.

When individuals are beneficiaries of a windfall gain, this may result in a sudden spike in their income. But, unlike corporations, individuals are not expected to share the profits with others.

Example of Windfall Gains

In industries like crude oil, where supply and demand make the major forces determining prices of the commodity, companies often become beneficiaries of windfall gains.

Prices of crude oil saw a steep rise from $60 per barrel in 2007 to $140 in 2008 which resulted from a variety of factors like supply problems in Nigeria and Venezuela, issues in the Middle East, the impact of Hurricane Katrina and several other factors. It resulted in huge windfall gains for gas and oil producers.