Question

To prevent gasoline prices from having devasting effects on the economy it had been proposed that all gasoline prices in the United States be fixed at the average price for the last two years. For simplicity it will assumed that this price is $2.50 per gallon. When equilibrium prices are under $2.50 per gallon the excess payments will be kept in a government fund. When retail prices exceed $2.50 per gallon money from this fund will be distributed to pay the difference. Do you think that this plan would help the economy? What affect would the plan have on the supply and demand curve? Would gas stations and oil companies be able to stay in business?

Answer 1

I think the current trend in the gasoline can give a brief insight about the idea intended. Since, it is the average price of the last two years, the immediate demand effects of gasoline might not change much, however the supply curve remains nearly the same but the demand curve varies accordingly to the changes in the price of the gasoline. This plan is indeed beneficial to the people or the customers considering the demand as it comes undernecessity and elasticity nature will be inelastic in nature. If the prices don't sum up high showing a lot of variations, it is worthy to mention that this plan helps the economy and also the competitiveness of the gas stations and oil companies is sustained in the market on the whole.