Fuel Subsidies Versus Market Power: Is There a Countervailing Second-Best Optimum?

Morakinyo O. Adetutu () and Thomas G. Weyman-Jones ()
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Morakinyo O. Adetutu: University of Warwick
Thomas G. Weyman-Jones: Loughborough University

Environmental & Resource Economics, 2019, vol. 74, issue 4, No 7, 1619-1646

Abstract: Abstract Fuel subsidies distort end-use prices below cost, resulting in overconsumption and huge environmental cost. On the other hand, the mark-up over cost due to the exercise of market power results in the social loss of consumer surplus. We open a new line of inquiry into the potential for a market-based solution from these two countervailing forces: can the two offsetting distortions conceivably achieve a second- best optimum? Relying on dynamic panel techniques and gasoline market data for 68 developing countries, we uncover an excessive second-best subsidy offset to market power mark-up on the order of 4.5. Our results indicate that the potential for policy failure strongly exceeds the potential for market failure in our model, and gasoline prices across our sample may not be aligned with vigorous anti-climate change policy.

Keywords: Gasoline; Fuel subsidies; Market power; Pass-through; Second-best; Developing countries; JEL Classification; C3; L1; L2; Q4 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10640-019-00382-3

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