capstone part 2 Flashcards
What is the likely extent of market failure in your sector due to externalities (positive or negative)? Provide at least two specific examples in making your case (including if you think externalities are unlikely to be significant).
Market failure is very likely to occur due to externalities.
One of the biggest negative externalities that could result in a market failure are from environmental concerns. Oil and gas production and consumption contribute to air pollution, water contamination, and greenhouse gas emissions, leading to climate change.
Another negative externality are national security externalities whereby with constant need of oil can lead to increased military and diplomatic expenditures to ensure a steady supply from unstable regions.
What is the likely extent of market failure in your sector due to excess market power? Provide at least two specific examples in making your case (including if you think excess market power is unlikely to be significant).
Market failure due to excess market power is substantial.
The Canadian Association of Petroleum Producers (CAPP) represents the majority of oil and gas producers and has significant lobbying power. This collective action could potentially influence policies in ways that benefit the industry but may not align with broader societal interests
In non-OPEC countries, one of which being Canada. The industry is dominated by a few large players. This concentration could potentially lead to reduced competition and higher prices.
What is the likely extent of market failure in your sector due to information problems? Provide at least two specific examples in making your case (including if you think information problems are unlikely to be significant).
One is environmental impact reporting where there may be information gaps about the full enviromental impacts of oil and gas operations. This could potentially lead to underestimation of true costs and overproduction.
Another problem is cybersecurity risks. The sector faces significant cybersecurity threats, with about 25% of Canadian oil and gas organizations reporting a cyber incident in 2019. Incomplete information about these risks could lead to underinvestment in cybersecurity measures.
What are two examples of demand or supply shifters in the past 10 years that could have caused prices to increase?
Geopolitical tensions, with events such as the ongoing Israel-Hamas conflict in the Middle East and Ukraine conflict threatened petroleum production and elevated crude oil prices.
With the general increasing global oil demand, particularly from emerging economies, it has put upward pressure on prices in the past decade. This includes countries such as China and India which have experienced rapid industrialization and urbanization, leading to increased oil consumption
What are two examples of demand or supply shifters in the past 10 years that could have caused prices to decrease?
Covid-19 Pandemic: The pandemic led to a sharp drop in global oil demand and prices in 2020, causing Canadian oil companies to cut production and investment. Global demand for oil plummeted due to lockdowns and travel restrictions.
Increased U.S. Shale Production: The shale oil boom in the United states increased global supply and put downward pressure on oil prices.
Is demand likely to be inelastic or elastic? Provide an explanation for your response using the factors determining demand elasticity specific to your sector.
Demand for oil and gas products is generally inelastic due to limited substitutes with many industries and consumers relying heavily on oil and gas products with few reliable alternatives. Oil and gas are crucial inputs for transportation and industrial processes, making demand less responsive to price changes.
Is supply likely to be inelastic or elastic? Provide an explanation for your response using the factors determining supply elasticity specific to your sector.
Supply seems to be extremely inelastic in the short term when developing new projects and with high fixed costs but slightly more elastic in the long term as new technologies emerge and with the expansion of operations.
This means, the percent change in quantity is smaller than the percent change in price.
Does the extent of government intervention (including lack thereof) in your sector appear to be driven by market failures? Or normative concerns? What do you think are the principally relevant concerns that might explain government policies?
Yes definitely, the intervention of government is strongly due to be driven by market failures. With policies aimed at reducing greenhouse gas emmisions such as carbon taxes which directly addresses the negative externality of climate change.
Another reason for governvment intervention could also be because of energy security ensuring that there is a stable or predictable domestic energy supply.
1) Complete positive analysis of the policy for your sector using theory we developed in this course. Your answer must touch on what the policy will do to: price, quantity, and welfare (efficiency gains or losses; winners and losers from the policy). You may
draw/use a market model in lieu of or to assist with your written description in this section if you prefer. You may also include additional positive considerations here, such as the “implementation challenges” we discussed in class for most policies.
The repeal of the carbon tax has many strong effects on the Canadian economy. First, we would see a price decrease and a quantity increase in petroleum products because of an increase in the supply of oil.
In terms of the welfare effects, we would see an efficiency loss with emissions being increased by 4.5 megatonnes in 2030 relative to the current trajectory.
The winners in this scenario would be consumers since 30% of homeowners who use furnace oil particularly in Atlantic Canada, would see immediate cost savings, especially in lower-income households. This would also help many others including those who live in rural areas and farmers who often need to spend a lot of money on fuel.
Additionally, Oil Companies would be winners as they would benefit from increased demand and potentially higher profits.
The losers from this would be the government as they would lose large amounts of revenue from the tax being exempted, climate-focused businesses and the clean energy sector.
Some implementation considerations would be to make sure that the benefits of the exemption is passed on to consumers rather than oil companies and that the implementation of the exception may vary across provinces which could lead to disparities in climate action and economic effects.
2) What normative considerations do you personally think are the most important in considering whether to proceed with this policy?
I think that for normative considerations, it can definitely vary from person to person. I think the most important normative considerations are based on pollution and affordability. Those who value affordability especially those who have a strong need for petroleum products would greatly benefit from the tax exemption.
Those who value reducing pollution/protecting the environment might likely not prefer this policy, unless
3) Make your recommendation on this policy. Your argument must reference and tie together the points you’ve raised in the previous two questions. If you are against the policy, recommend an alternative course of action (which can include doing nothing).
Possibly it might be good to offer a somewhat balanced policy whereby the carbon tax is lowered gradually, allowing for a smoother transition. By lowering the carbon tax, It can theoretically help farmers to increase their supply, driving prices down for the consumer. It is also important to note that farmers in the United States don’t pay a carbon tax, thus giving them a competitive disadvantage. I think that we maybe focus on potentially gradually lowering or just keeping it at a low rate. We could possibly focus more on alternatives (such as the cap and trade system which incentivizes lower pollution) that target major polluters rather than those affected by affordability. Also I think its a good idea to set up new projects for clean sustainable energy or technology that directly combats pollution.
