Tag: incidence of subsidy

With oil prices over $100 a barrel and petrol prices over £1 per litre, it is difficult to imagine a county where the entire tank of a 4×4 can be filled for 42p, but Venezuela is just such a country. Not surprisingly, Venezuelans are resisting any attempt to change the level of subsidy that creates this situation.

Cheap and cheerful: Venezuelans cling for right to petrol at 42p a tank Guardian (18/1/08)

Questions

1. Using supply and demand diagrams as appropriate, show the impact of the Venezuelan fuel subsidy on the equilibrium price of petrol.
2. Assess the impact on economic efficiency of a subsidy on this scale.
3. Discuss the impact on the socially optimal equilibrium level of output of the Venezuelan fuel subsidy.