Oil Prices

There you go again !!!

The facade of a caring government came crashing down when the government was literally forced by pure economic considerations to raise the prices of petrol and diesel by Rs 2.5 and 2.0 respectively.

I have never understood the economics of subsidies. Oil products' prices affect everybody, and it would be foolish to assume that they don't. But why would you want to provide a cross subsidy, by putting one man's burdon on another, is beyond me.

To be fair, if it were an essential drug, the lack of access to which could result in numerous deaths, by all means, subsidise it. But oil?

Even in the case of the subsidised essential drugs, there can be arguments against it, but I would come back to it later.

Firstly oil.

Firstly, as I mentioned earlier, why should I bear someone else's burdon?

Of course there's a very compelling humanitarian argument against it.

But also consider that if you consider per capita oil usage, the rich use much more oil than the poor. So if the rich use 2 litres of oil a day, and the poor use 0.5 litres of oil a day, a subsidy of Rs 2/litre of oil makes it s subsidy of Rs 4/day for the rich and Rs 1/day for the poor. Thus a big chunk of government's subsidy money goes into subsidizing the rich. What an utterly untargetted help to the poor !!!

Finally, when one product in the market is subsidized, you stifle the innovation that could lead to development of alternative products. For example, as long as LPG cylinders are available for Rs 250, after a Rs 130/cylinder subsidy, no one would want to switch to bio-gas, or solar cookers. One of the reasons why innovation failed in the welfare states (including India) was the absence of the incentive to innovate - you got it - because of subsidies.

A friend recounted a very interesting story. In the USSR, the state subsidized the bread so that the poor could eat. They subsidized the bread to that extent that it was cheaper than cattle feed, and the people fed bread to their animals !!!

Wherever the state has tried to be a (pseudo) welfare state, it has
1. forced one (rich) man to take up another (poor man's) burdon,
2. spend more money on the rich than poor,
3. stifled innovation that could get cheaper, better, faster product in the market.

If you look at points 1 and 2, you'd realize that they cancle each other out. The rich pay more tax, and take the bigger chunk of the subsidies, because they consume more. The poor pay less tax and get a smaller share of the subsidies. Sounds good? Then why do we need subsidies anyway? If I am rich, but don't use much oil, then I end up cross subsidizing other rich !!! (This even does not have any humanitarian aspect to it).

When we have examples of welfare states failing (including the USSR and China giving up on its welfare commitments and taking the path of Capitalism) why would you want to try all of them out yourself?

Because only in dictionary economics comes before politics.