Petrol Prices in New Zealand: A Case Study

Price Elasticity and Petrol Companies

Word count: 1,000 words Note: the standard allowance is an excess of 10% of the word count; i.e. you may go over the above stated word count by 100 words.

Any excess beyond this point will be penalised. Going under the word count is not penalised as such, but you will likely find that you are unable to adequately explain the assignment with too few words. References (including in-text citations and the at-end reference list are not counted in the word-count).

The Prime Minister and the Leader of the Opposition in New Zealand both acknowledge that petrol prices are “high” in this country, but each highlights a different reason for this. "You will remember our instinct was that New Zealanders were being fleeced at the pump – now the Commerce Commission has confirmed that that is true." – Jacinda Ardern [1] "For all the blame on the petrol companies, the biggest increase this term will be petrol taxes from Jacinda Ardern." – Simon Bridges [2] The Commerce Commission notes that, on average 91 octane petrol has a discounted price of $2.14 per litre, where $0.83 is the cost, $0.34 is the profit margin, and $0.97 is tax [3].

1. Given what you understand about price elasticity of demand, explain why petrol companies may be able to effectively raise price to obtain higher “margins”. Use a suitable diagram to illustrate your answer.

2. Either using the same diagram, or a new one, explain the impact of petrol taxes on price in the market, and how the burden of petrol taxes are likely to be shared between the consumers and suppliers of petrol.

3. Based on what you have identified, explain why petrol prices continue to be so high in New Zealand. Suppose the government managed both to make petrol companies lower their profit margins, and to lower its tax on petrol. What impact would you expect this to have on the price and quantity demanded of petrol?

4. What are the advantages to society of lowering the price of petrol in the market? What are the disadvantages? Based on your discussion, do you think the government’s intervening in the market to lower petrol prices will be beneficial for society?

This essay assignment does not require a standard structure of introduction, body and conclusion; however, please read the marking scheme below, as other aspects of formal essay writing, such as paragraphing and logical sequencing of arguments and referencing are required as part of this assignment.