Government Resource Subsidy and its Spillover Effects: Evidence from the Excessive Oil Consumption in China

Rattaphon Wuthisatian

Eurasian Journal of Economics and Finance, 2014, vol. 2, issue 1, 1-12

Abstract: The paper aims at analyzing the consecutive consequences of government resource subsidies in a particular industry, which can lead to the excessive oil consumption by other sectors and end users. To fully illustrate the investigation, we use the subsidies in Chinese steel production as a case study and a beginning point to develop theoretical and empirical models to examine the spillover effects, going from steel industry to a rapidly increase of overall country’s oil consumption. The theoretical model applies the market equilibrium concept to demonstrate a relationship among three economic sectors; steel industry, automobile, and households. Particularly, the government subsidies in Chinese steel production will enable the steel firms to obtain resource inputs at the lower price, making the output price of steels cheaper than the market price. As steel is a required input in automobile industry, this cheaper price of steels will induce the automotive firms to increase their production capacity, producing more cars and selling them at the cheaper price, which eventually results in the excessive usage of oil and gasoline by individuals. Using the data during the period of 1980-2012, the empirical analysis involves OLS regression and cointegration test to approve the validity of the theoretical model, which emphasizes on the strong relationship between Chinese oil consumption and steel production.

Keywords: Oil Consumption; Government Subsidies; Spillover Effects (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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