i. Explain the economic problem of scarcity by using demand and supply factors relevant to the price of petrol in the UK.
ii. Analyse potential externalities that may arise in the petrol market. How can the UK Government seek to ensure that such externalities are taken into account by the petrol market?
1: The trend component of the price of oil is rising. This has an implication that the global market oil is going to enter in a period in which there is a rising scarcity. Here is a demand and supply analysis for the effect of rising price of crude oil in UK (Baker, 2010). From the demand and supply analysis, it can be said that the sustainable increase in the demand for the crude oil all over the world and the limited supply of it causing the rising trend in the price of crude oil. For the same reason there is arising a scarcity in the crude oil market in UK.
The analysis of this scarcity problem has reveals that the effect of the increase in the scarcity in the oil market can be managed relatively by the primary downshift in the supply trend of oil. It can be noted that it will result better if the decline in the supply of oil should be gradual than the absolute decline (Davis and Reilly, 2010). In addition it can be noted here that presently in 2015, the oil price is falling. Now, the falling of the oil pr5ice is a great problem.
Downshift in the supply of oil
A considerable downshift in the growth of the supply trend of oil of about 1 % helps to slow down the global growth by about ¼ % and the annual growth at the global level results in longer or medium term (Do policymakers need to cool the UK housing market?, 2014). A continuous decrease in the supply level of the crude oil in UK has considerable adverse effect on the output level. It can be happened if there is a higher level of substitutability between the other preliminary sources of energy and oil. On the other hand, the wealth or revenue acquired in UK from the oil will shift from the importers of oil to the exporters of oil in the medium term and that will raise the flow of capital, thereby reduction in the real rate of interest and the current amount imbalance will rise (Dransfield, 2014).
This particular assignment shows that the scarcity of oil will certainly be a powerful constraint in the world economy (Drummond and Hodgson, 2011). So the risk emergence it causes is very serious matter worldwide. Reaches on the substitute of oil are in progress. But still it is uncertain. So the full dependence on the other sources of energy is still uncertain.
Measures for reducing the risks
It is very obvious that the policy makers in UK should adopt stronger measures for reducing the risks from the crude oil scarcity (Drydakis, 2014). The policy makers should take precautionary steps in this matter. They also should facilitate the adjustment process if it becomes larger then it was expected or it has to be materialized in a rapid manner.
Policies require to be balanced with labors to make stronger societal security nets, as the higher price level of oil may lead to alter in the distribution of income and make poverty level greater than before(Gil Lafuente and MerigoÌ, 2010).
The allegations of oil insufficiency could be significant and extensive. Oil is a main factor of the process of manufacture, as well as in the manufacture of other produces and in shipping, and also broadly used for goods for consumption(Gillespie, 2010).
Oil takes the majority part in over all traded commodity in this world. This implies that oil has a significant effect, direct as well as indirect on the global economy. This has effects on the several economic factors, such as, world inflation, poverty level, growth and external balances. From the late of the year 1990, the price level of oil has generally increased(Gurtuna, 2013).
Oil is considered as a scarce factor when the demand for the oil is greater than the supply of it. The supply is unable to meet the demand at the existing price level. Then the price will rise and this will encourage the supply of oil. On the other hand, the rising price of oil will reduce shortly the demand factor. This means that the scarcity of oil is related with the price of oil. So it can be said that the oil scarcity always reflects in the price of oil. The price of oil also reflects the opportunity cost (Hall, 2011). The opportunity cot is in terms of bringing one barrel of oil in addition in the market. Generally, a higher level of price comparative to the prices of other commodities points out the scarcity. On the other hand, a lower price points out large quantity, and fluctuations in the level of price over an extensive periods indicates alterations in the scarcity (Hayes, 2014).
However, it is to be noted that it is very difficult to differentiate the reasons for increase in the price level. It can be the scarcity or can be other kind of reasons. The scarcity indicates the decline in the accessibility of oil in the long term. The scarcity of oil in the logic of lofty and rising oil prices also can be arose for many other causes over shorter sphere (Ibelings, 2010). Momentary shocks in the supply may direct to short lived price spear, as throughout the year of 1990–91, in the Gulf War.
Choice and opportunity cost
Choice and the opportunity cost are mainly two basic ideas in economics. When the resource quantity is a constraint factor, then the consumers and the producers have to make selection within the alternatives of competition. All decisions regarding economy involves mainly in the choice making (Leonard, 2011). Any consumer or the producer has to choose the best way of using the effort and skills. The firms in UK must have knowledge about the usage of the machinery and workers available to them. Now, the making of choice always involves in the sacrifice of something. This happens as the alternatives should be given up. These results in the sacrifice of the benefits could be gain from the various alternatives, which were available at the same time (Leonard, 2011).
The demand and supply analysis can be shown by using a diagram.
Here in this following diagram it can be shown that as the demand rises, the demand curve shifts upward and the price rises, the supply remaining the same and vice versa (Mankiw, Taylor and Ashwin, 2013).
This particular assignment mainly focuses on the problems emerging from the scarcity of oil. The price rise is indication of scarcity. But it is avoiding the other matters which may affect the price, such as the business cycle. The business cycle has a great effect on the changes in the oil prices (Newbold, Carlson and Thorne, 2013). The price of oil may also be affected by the implementation of explorations, new discovery, capital investments etc.
Presently in 2015, the oil price is lowering. There are several problems for the low price of oil. Some problems are as follows: increase in the debt defaults, the interest rates are rising, unemployment rate rising, recession increases, oil supply decreases, disruption in the countries those export oil, drop in the prices in the stock market, drop in the bond’s market value etc (Sloman, Hinde and Garratt, 2010).
The fall in the price has also a number of problems itself. For the falling price of oil, the debt defaults increases. The debt default can increase in the oil extraction businesses, workers of laid off oil etc (Starkman, 2013). On the other hand, the interest rate will rise. The unemployment rate also increases. The increasing unemployment rate couples with the high rate of interest causes recession. The supply of oil decreases as a result of the falling price of oil.
Externalities are the side effects in the economy or environment of a good or service, which creates costs or benefits to people. In general, the externalities are meant by the costs or the benefits imposed by a firm or industry on the outer side of the whole marketplace or within the marketplace (Starkman et al., 2012). The petrol market has several negative as well as positive externalities. Externality is classified broadly into two types, such as positive externality and the negative externality. Positive externalities are those benefits, which are acquired by the people from the good or service by a firm or industry. On the other hand, the negative externality is subject to those externalities, which affects negatively the people or the environment (The growing UK 3D printing market, 2014).
There are so many positive externalities emerging from the petrol market. This is very obvious that petrol is maximum used in the people’s lives. People cannot even thing without the usage of oil or petrol. In various stages of the human life the petrol is used. Some kind of positive externalities regarding the petrol market are as follows: Economic profit, increased efficiency or the productivity, Means of Globalization (UK company looks to crowd funding to bring natural water filtration product to market, 2014). These are discussed here.
Economic profit – employment becomes greater than before, different commercial activities introduced. There are several economic profits involved in the petrol market. The employment rate increases(Ummer, 2012). The employment rises in the oil factories. There are several production houses, in where the petrol is ides. Those are also part of employment created by the petrol market. Petrol is involved in different commercial usage. Those commercial hubs recruit many people as employee.
Increased efficiency or the productivity – usage of oil speeds up proficient manufacture in many industries. The productivity increases with the use of oil. There are so many machineries, which run with the help of oil. Those machines are increasing the productivity in various sectors(Vergnet expands services for UK market, 2014).
Means of Globalization – this increases the trade between several countries.
The mainly public concentration paying attention on ecological damages as extraction, resource exploration, processing and lastly, distribution are the reason of environmental damages. It also includes the natural world territory disturbance, and discharge of air, sound and water pollution. Externalities are the really bad sided effect on the environment of the world. In many production processes of several goods including the oil extraction, there are so many negative externalities (Wessels, 2012). The negative externalities always affect adversely the people of the country. An important example of the negative externality is pollution. The oil extraction causes pollution.
Some kind of negative externalities are as follows: the damages in the environment for the petrol market, health risks involved, economic costs, limitation of resources, security risks, financial subsidies etc.
Damages in the environment – The environment damages from production of oil, distribution as well as the consumption. During the process of extraction of oil, the water is negatively affected(Wessels, 2012). So there occurs water pollution. The exploration process pollutes the air. So there occurs air pollution. The processing of oil also affects the air as well as water badly. So in the stage of processing of oil, both of the pollutions, such as water pollution and the air pollution take place(White and Herrera-Soler, 2012).
Health Risks – Several types of risks are involved in the petrol market. This includes injuries and sickness of the people or the workers from petrol production and distribution.
In the petrol market, the workers have to take severe risks in extracting of oil and the processing. The extraction process is very risky for any person or worker. So many injuries happen on the body of the workers. On the other hand, the processing of oil emerges toxic gases, which are really very harmful for the human body(Zhou, 2011). So those workers, who do job in the oil factory and stays during the processing of oil, suffers from various illnesses, so, health risk is very significant externality involved in the petrol market.
Economic Costs – A number of economic costs are involved in the petrol market. Mainly the economic affect of imported oil. Several economic costs are there with the oil or the petrol market. This is very true that the price of the oil ion the international market play a significant role on the economies of the countries all over the world. So, if there is any fluctuation in the oil prices, then the economies of the oil importing countries will be affected negatively(Baker, 2010). This is another negative externality of oil. As the price increases, the oil importing countries have to pay much more than before. So the other economic sectors are hampered.
Security Risks – Opinionated and armed costs to continue or to keep up the right of entry to oil recourses involves security risks(Davis and Reilly, 2010).
Restriction of Recourses – Another negative externality is to deprive the upcoming generations from non-renewable sources like oil. The oil scarcity is very important issue involved in the oil market. It is very difficult to determine the quantity of oil can be extracted. The resource like oil is limited in the world. So the extraction of oil regularly causes fall in the reserve of this particular resource. The future generation will have to be deprived from the usage of oil. So the future is very uncertain in the case of scared resource like oil(Do policymakers need to cool the UK housing market?, 2014). Petrol is variously used but the people. So, it is very difficult to think about a world without crude oil. But is it also true that a period is supposed to arrive where the people will not use crude oil.
Financial Subsidies – There are various financial subsidies to the producers of oil.
For those negative externalities, there should be incentives for the consumers or the producers to cope up with the adverse situations. The problems emerging from the externalities can be solved by the Government intervene (Dransfield, 2014). Here in this section it is going to be discussed various way outs.
Imposition of tax on the polluters
If the business procedure causes pollution, then that business should be taxed accordingly. As tax is imposed on the business company, the cost of the production will automatically raise. The rise in the price level of oil depends on the elasticity. If the price is very much responsive, then the price will raise more with the tax imposition. However, it can be noted that the producers the ultimate tax payers.
Now, theoretically it can be said that, the size of the external cost or the negative externality is nothing but the difference between the marginal private cost curve and the marginal social cost curve. Now, it is the responsibility of the government to assess correctly the cost for the negative externality (Drydakis, 2014). If the government is able to determine and thereby calculate the cost for the negative externality, then the government will be able to impose the correct or right quantity of tax. Now, if the government imposes the right level of tax, then the marginal private cost curve will start to shift and it will shift till it superimposes on the marginal social cost curve. This determines the equilibrium level of price and the quantity and ensures that the consumers as well as the producers are in the situation of equilibrium.
Taxes cause the shift in the supply curve to upward or to the left. This upward shift of the supply curve causes the rise in the price of the crude oil and reduces the output of the oil. This happens through market mechanism (Gil Lafuente and MerigoÌ, 2010). So the external cost is reflected in the rising price as well as in the reducing cost level. But there may be external benefits also. So in the case of external benefits, a firm and a government has to compensate, which are discussed bellow.
The use of subsidies
If there are positive externalities, then the business authority should be subsidized. There are so many external benefits of the petrol market. Those are discussed above. The petrol is variously used in daily life, transportations, machineries etc. It has also several economic externalities, such as employment generation, productivity increase etc. Those positive externalities are to be supported by the government as it is very useful for the goodness of the country as well as the society (Gillespie, 2010). Therefore, the demand can be raised by the paying subsidies from the part of the government to the suppliers or the producers. If the cost burden is partly minimized with help of the subsidy paid by the government, it will encourage the production as well as the consumption of oil. Therefore, it is the responsibility of the government to determine the exact level of the subsidy, which should be paid to the producer. The subsidy paid by government encourages the supply by reducing the cost of production and thereby reducing the price of oil partly. The reduction in the price level encourages the consumption level.
Theoretically it can be shown that the size of the externalities and thereby the amount of tax or subsidies. But in the real world, it is very difficult to determine the level of tax or subsidy. Sometimes the government has to be direct in the cases of imposition of tax or paying subsidy. Some interventions are, price ceiling, price floor, subsidy (Gurtuna, 2013).
A price ceiling happens when a legal boundary on the price level of oil created by the government. For an effective price ceiling, the government has to set the ceiling bellow the equilibrium level in the market (Hall, 2011). When the price ceiling is set, there will be automatically a shortage as the demand factor is greater than the supply factor.
The price floor is the minimum price level set by the government. No one is allowed to sale oil below the price floor. This is done for the sake of producers suffering from comparatively higher cost of production (Hayes, 2014).
The subsidy is a financial assistance given by government to lower the cost of producers as well as to encourage the demand by lowering price level. Thus the employment can be raised (Mankiw, Taylor and Ashwin, 2013).
These are the assistance or policies can be taken by UK government in the petrol market for the externalities.
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