IA commentary draft 1:

By Wesley Hudson

Title of the article: Petrol Prices: Government considers fixing a maximum price for fuel.

Source: The South African

Date: 11/10/2018

Link: https://www.thesouthafrican.com/news/petrol-prices-government-to-set-limit/

Terms to define:

a) Price ceiling

b) Negative Externalities

Currently South Africa is experiencing price hikes in the cost of petrol. This is due to the fact that
government intervention is required to protect the interests of consumers and businesses outside of petrol
companies. Government invention is likely to be the introduction of a Price Ceiling. A price ceiling is a
government- or group-imposed price control, or limit, on how high a price is charged for a product,
commodity, or service. This is to prevent Negative Externalities that can be suffered by a third party as a
consequence of an economic transaction. In a transaction, the producer and consumer are the first and
second parties, and third parties include any individual, organisation, property owner, or resource that is
indirectly affected.

The initial situation can be depicted in the following graph. Currently the price for petrol is exciding the
demand and the supply is relatively normal.
P$

S=MSC
P1

Pe Equilibrium

P2

D=MSB

Qd1 Qde Qd2 Q

Currently fuel is within Qd1 and P1, because of this the consumer is being forced to pay a higher cost for
petrol leading to the over all demand being low. Due to this, there is the creation of negative externalities
occurring. These would include effects on the agricultural industry as “transportation costs have soared as
a means to rebuff the rising costs of petrol. This means that every South African, whether a motorist or not,
is unable to escape the brunt of rising petrol prices.” The cost of fuel at the time of the article was 17 Rand
for 1 litre of petrol which calculated for inflation and conversion would be $1.42 AUSD.
 This would force more negative externalities for not just consumers as seen in the previous quote but
would affect business directly. Due to consumer being un-willing to pay for fuel due to its high costs and
forcing more onto the public transport network. This would then lead to government expenditure due their
P$ subsidies for these companies having to pay for their fuel. However, via the introduction of a price ceiling
the following will occur.

S=MSC
P1

Pe Equilibrium

Pc

D=MSB

Qd1 Qde Qd2 Q

By setting a price ceiling below the equilibrium price at P2 it would become advantageous for consumer
and businesses. Firstly, by setting the price at regulated level below Pe consumers still can purchase petrol
at reasonable level and expect no major shortages in supply. But due to petrol highly sort after nature it
will mean demand will stay the same as some would argue that petroleum is a staple good in modern
society. Secondly by moving from graph 1 to graph 2, some businesses will not experience the benefits of
Pe due the price being set below equilibrium. Though due to the high demand of petrol and its venerability
to externalities eg: War and trade tariffs, Pe is likely to never be accomplished if only for a specific time
frame. Thirdly by introducing a Pc the MSC for the creation or importation of petrol to South Africa, is
kept relatively low, this leads to minimal externalities on the consumer making them more likely to
purchase more. Whilst on the other hand Pc allows for the MSB to kept relatively well benefiting the
consumer, as petrol is again arguably a staple good.

Therefore, if South Africa decides to impose a price ceiling on petrol. It would see the short-term
protection of its local industry eg: agriculture and transport. As they would not have to pay $1.42 AUSD a
litre for petrol. Which in these industries requiring many KM of transport and farming would manage
inflationary pressures on cost of goods and services sold.

A price ceiling would also prevent the creation of certain other Negative Externalities, such as government
subsides for public transport being spent on fuel rather than upgrades to new and cleaner bus etc: and
prevent strikes and or protest due to fuel cost. Though in the long term by also increasing a Pc consumer
will be more inclined to use cars and other forms of fossil fuel transportation. Leading to the creation of
more carbon emission and health/environment negative externalities. Also, local fuel companies might run
into shortage problems as the demand exceeds the supply due to the regulated price. It also decreases
competitiveness in the market.

So therefore, if the South African government decides to introduce a price-ceiling on petrol it would likely
have a mixed set of positive and negative consequences. This balance of economic pros and cons is what
governments have to consider in their policy settings.