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Microeconomics Question from Walter E. Williams:Edit

A number of techniques are available to cope with increased scarcity and higher world prices of petroleum. Analyze the following in terms of supply-demand responses in the short run and long run:

  • (a) Price freeze and "rationing by queue" (waiting lines for gasoline).
  • (b) Price freeze and rationing by coupon (non-salable).
  • (c) Rationing by coupon (non-salable) without a price freeze.
  • (d) A tax on all petroleum used.
  • (e) A tariff on imports of petroleum.

AnswersEdit

  • (a) In the short run, companies will hold inventories and restrict output waiting for the ‘crisis’ to pass. Consumers pay a higher price the binding ceiling gasoline price, plus the high cost of waiting in lines, the risk of running out of gas, etc.

In the long run, companies will exit the industry to gain returns in industries of higher profit. Meanwhile, consumers will seek alternatives to high gasoline usage (different type of commuting or living arrangements, for example). Different people have a different opportunity cost of waiting in line. Those with the higher cost will be more likely to hire others to wait in line for them, or explore the various alternatives.

The lost gas while cars wait in line is another source of efficency cost.

  • (b) All of the same results above apply, with the additional of a new black market in rationing coupons. Those with a lower gasoline requirement will provide their excess coupons to the market. Society will bear an extra cost to law enforcement and monitoring as scalped and forged coupons become more prevalent. In the prosocution of these black markets there are wasted resources. ( unless we are to assmume equality in results justifies this expence, in which case the question is -- where is the equality in results )
  • (c) Producers will continue to supply gasoline in the short run. However, due to the rationing, they will be unable to sell the same quantity, and so will accumulate excess inventories. The producers will seek to dump their excess on the world market, where there is no rationing, if allowable by law. Again, a black market for gasoline coupons will emerge where those with low requirements will attempt to sell their excess coupons to those with higher requirements. In the long run, supply will shrink as producers exit the market in search of higher profit opportunities, causing the price of gasoline to rise until it meets the quantity demanded by the public.
  • (d) A tax on all petroleum will decrease the short run demand for petroleum products only where such demand is elastic. In the long run, changes will be made by consumers to reduce costs, such as switching to more energy-efficient transportation, or moving closer to work.
  • (e) A tariff on imports will protect domestic production of oil, but will cause the overall price level of petroleum products to rise, as the less expensive foreign oil becomes more expensive. This will raise the costs of individual consumers and businesses. General price levels will rise, and the cost of the tariffs will be passed on to consumers in the end.

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