Tuesday, February 2, 2016

India's Diesel Pricing Policy Change

The Wall Street Journal reports that India has changed their diesel fuel pricing policy and moved from a pricing policy that is essentially a per unit subsidy to letting diesel prices being determined by market forces.  In Principles of Microeconomics I examine the economic welfare of a per unit subsidy and show that while producers and consumers are better off in terms of surplus that the government is worse off, and that the loss to the government is greater than the aggregate gains to the consumers and the producers.  Given the substantial expenditures that the government of India is incurring, the policy is changing from government administered pricing to market driven pricing.

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