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. |