Effects Of Fuel Prices On The World 's Dumbest Transportation Policy

2073 Words9 Pages
The subsidisation of fuel has been a worldwide phenomenon since the volatility of fuel prices began to significantly affect economic interactions within and between local, national and international economies. Whilst originally intended to benefit society, they have since been labelled by some as “the world 's dumbest transportation policy” (Morris 2014 p. 1), due to their widely entrenched and long-lasting economic repercussions. However, proponents continue to maintain that they are a valid economic tool. Claimed advantages of subsidies include the perpetuation of societal stability, creation of economic benefits and the generation of positive externalities. In contrast, claimed disadvantages such as the deadweight loss to society, the…show more content…
2012). Using the Figure 1, this process can be shown as follows: the subsidy enables greater production, shifting the supply line from ‘Supply’ to ‘Supply + Subsidy’. The new market equilibrium is at (P1, Q1), a greater quantity and lower price than the old equilibrium (P0, Q0). However, to supply at the new equilibrium quantity Q1, producers need the higher price P2, reflecting the increasing marginal cost of production. The government pays the difference (P2-P1) per unit of fuel, thus making total government expenditure equal to areas [B+C+D+E+F]. Figure 1: The Effect of Government Fuel Subsidies Following the 1970s oil crises, subsidization of fuel intended to provide a more stable supply and a low pricing system to its citizens. The advantages to fuel subsidies included ensuring the security of supply, providing economic benefits and encouraging development to industrial sectors of the economy by stimulating growth, expanding national and international economies and fostering innovation through technological interactions (European Environmental Agency 2004). Subsidies can also provide environmental improvement, especially when the international energy pricing fails to account for external costs (European Environmental Agency 2004). Subsidies also maintain local employment and provide social benefits particularly when sudden increases
Open Document