Answer to Question #190858 in Economics for Naren

Question

If the primary objective of government programs in each of these areas is the alleviation of some market failure, how might they be better designed? (a) Farm price supports (b) Oil import quotas ( in the 1950s) (c) Special tax provisions of energy industries

Answer 1

(a) Support for prices for agricultural products is direct assistance to households that produce agricultural products, and not by direct subsidies, as it would seem simple to do at first glance. Price support stimulates market competition for product quality.

 (b) Oil import quotas (in the 1950s). In the mid-1950s, when the key future OPEC members - Venezuela, Saudi Arabia, Iran, Iraq, and Kuwait - were thinking about creating a community of oil exporters, the structure of the oil industry was radically different from the current one. The industry was ruled by the "seven sisters" - the Anglo-Saxon oil companies, which at that time controlled 85-90% of the world's oil reserves. They were British British Petroleum, Anglo-Dutch Royal Dutch Shell and American Esso (hereinafter Exxon), Mobil, Gulf Oil, Socal (future Chevron), and Texaco. In developing countries, these companies received concessions under which they were entitled to exploration and development of fields, taking all produced oil into their refining and marketing systems, and paying local governments a fee - usually a fixed amount per barrel produced. The world oil market, like the world oil price in today's understanding, did not exist - the “seven sisters” redistributed and refined the produced oil mainly independently or on the basis of long-term contracts, spot transactions accounted for several percent of the total turnover of raw materials.

Thus, quotas have become an adequate response to the current situation.

 (c) Special tax provisions for energy industries are introduced because the value of energy products is reflected in the value of all goods and services.