Question

You are the new Minister of Energy.

The gasoline market is initially in equilibrium but, for reasons beyond its control, the demand for gasoline increases strongly and permanently.

Low-income consumer groups whose gasoline is a commodity essential to their work are lobbying the government to regulate the price of gasoline in a way that eliminates the price impact of increased demand of gasoline.

Q.1 What kind of regulated gasoline price could be established at the initial equilibrium price level to meet their demands.

Q2. Is it effective? Why?

Q3. Is it fair? Why?

Answer 1

Answer - If the people of lower income group are demanding lower prices for gasoline , the government can set up the price ceiling on gasoline. This will be set below the equilibrium price and will be effective because now , the price will be less than equilibrium and people will be able to buy it at lower prices.

But , it is not fair. This is because , firstly , it will cause the shortage of gasoline in the market as supply would be less below the equilibrium price. Secondly , as the price will be set below the equilibrium price , the producer surplus will fall and hence it will lead to the creation of deadweight loss in the market making the market inefficient. Hence it will not be fair.