2008-05-22
China said speculation it may lift curbs on fuel prices as early as next month is ``baseless'' as the nation seeks to recover from its deadliest earthquake in 32 years and combats accelerating inflation.
I saw this on bloomberg website and couldn't help thinking about our vain policies.
Who are those people benefiting from this kind of interventions? And who are those people getting hurt simultaneously?
The purpose of capping the oil price is to curb the already scary inflation, which is regarded the most dangerous foe of the economy. However, the price control is never a wise solution without a price. Now let's see consequences of the action.
A, Beneficiaries. Domestic people who are consuming oil are suffering less than those who are being exposed to higher market prices. And the price protection stimulate them to consume more. They are also those who are already richer in the economy.
B, Victims. The first group are the refiners, like China Petroleum & Petrochemical Corp. and PetroChina Co., who are struggling to oil tax and the lost cause. Good news for these companies is which we've already known, financial subsidies from government, ultimately taxpayers, especially those who use less or little fuel, when they have to pay the same rate of tax of their income, wholesalers, for example.
After we understand how the policy has affected the distribution, we have more to think about. The price meddling means the government have no intention to encourage industry consuming less fuel, which is with identical meaning of maintaining the demand, so the price never goes to a lower equilibrium. Basic economics disciplines tell us when the Marginal cost is higher than marginal revenue (MC>MR) we slow down the output, as what refiners in China are doing. Why should the government connive a costly output with shifting treasure from a group to another?
And finally, would this intervention restrain inflation? Probably not. The demand of oil continues to fly, the real price follows. Maintaining the output requires resources other than oil as well.
After the incomprehensible stamp tax cut, and the crude oil price meddling, the better thing to do for the government is to do nothing.
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