Essay Sample on High Petrol Prices in New Zealand: Exploring the Concept of Price Elasticity

Introduction

New Zealand petrol prices are well above the global average although they remain below the highest range. The Commerce Commission has noted that 91 octane petrol has an average discounted cost of $2.14 per liter where 0.97 is tax, 0.83 is the charge, and 0.34 is the profit margin. (Walls, 2018) The Prime Minister and the Opposition leader have approved the high prices of fuel in the country. Price elasticity of demand is the main concept behind high prices on fuel in New Zealand. Price elasticity of demand is a fiscal measure of the transformation in the quantity demanded or bought of a product in relation to its price change. Price elasticity is utilized by economists to comprehend how supply or demand transforms given changes in price to comprehend the operations of the real economy. The paper examines the reasons for high petrol prices in New Zealand.

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The Prime minister's statement illustrates that individuals are demanding petrol even at a high price. It illustrates that the demand curve is price inelastic which means that the burden of the tax will be on the customers.

Based on the diagram, DD is the demand curve while SS is the supply curve. The curves intersect at P which is the equilibrium price. Therefore after the tax (t) by the government, the customer has to pay Pb and the producer will acquire Pa. As clearly seen in the diagram, the burden of tax is usually on the customer and the producer has a limited burden of the tax (t). Eventually, the producer can set a high price.

Petrol taxes are likely to have an impact on price in the market. The price elasticity of fuel may increase in the longer term, impacting the amount of revenue. Fuel taxes can change the relative prices of fuels: huge variations in tax rates among different products can result in consumers switching among products or adulteration (Palmer & McCann, 2019). Fuel taxes establish a wedge between the price the final customer pays and what the producer receives. The division of the burden of fuel taxes between consumers and suppliers of petrol is usually referred to as tax incidence.

Based on the diagram above, when fuel tax increase, the price of petrol increases from P0 to P1. The producer does not want to incur the extra costs on fuel and therefore pushes the cost to the consumer. The price that the consumer pays due to fuel tax is higher than what would exist in the market without tax, but not by the whole amount of tax. At normal situations, the consumers will pay Price P0 for fuel and suppliers will supply at S0. However, fuel tax means that the supplier will supply at S1 while the consumer will purchase the product at P1.

Fuel prices continue to increase in New Zealand. One of the reasons for high fuel prices is that world demand for fuel is surpassing exploration and refinery capacity. This is what has conventionally made prices to rise. When supply is inelastic, interruptions or the mere of interruption to oil well or refinery capacity like a natural or war can make fuel prices to rise. Investment speculation is also a reason for fuel price upsurge in New Zealand (Walls, 2018). Finances from investment funds are being invested in products such as oil and food in response to a weaker world fiscal environment and a weak U.S. dollar. This investment in oil stock is resulting in fuel prices spike.

Fuel tax is also another aspect that is causing an increase in prices. Government policy mainly in the form of taxes and subsidies- highly influence how prices at the pumps differ across the world. Generally, New Zealand pays the highest petrol prices reflecting high taxes on fuels. Tax comprises a huge part of the final price in New Zealand with prices above the average (Taylor, 2019). However, it is impossible to explain whether the price of fuel would be lower in the absence of the tax. In some situations, retail fuel prices are propelled by the cost of shipping fuel and the scale of the market at the location of the distribution.

If the New Zealand government lowers its tax on petrol and manages to make petrol firms to lower their profit margins, there would be a huge impact on price and quantity demanded. The prices of petrol are likely to decrease meaning that the demand would be high. However, this would be on the short-run because consumers would purchase more quantities and keep them as stock as they anticipate an increase in future prices. In the long-run, the demand would be average because consumption cannot increase above the normal rate. Lowering the price of petrol in the market is likely to empower the society. People will be able to afford petrol and manage their activities. However, increase in petrol consumption means that the combustion of fuel will be high. Therefore, the environment will be contaminated: especially air and water pollution.

Government's intervention in the market to reduce petrol prices is likely to be beneficial to society. The government is likely to address the issues of inefficiency which are most common in the fuel market. Wealthy people purchase petrol in bulk when the prices are low. Since poor people cannot afford to buy stock, they end up purchasing fuel even when the prices are high. Therefore, government intervention will ensure that fuel prices are low and stable for everybody to afford. Interventions will also ensure that economic events like inflation and recessions are avoided. These economic events can be devastating to the people. Lowering petrol prices means that people in low-income households will be able to purchase fuel without restriction. This will improve their living standards and social welfare (Bohi, 2013). The resolution will also ensure that no one wields monopolistic power in society.

Conclusion

Conclusively, the fuel prices in New Zealand are generally high. The Prime Minister, the Leader of the Opposition, and the Commerce Commission have all agreed that citizens are being fleeced at the pump. Most of the blame is placed on the petrol firm, who is known to increases. However, petrol taxes have been identified as one of the reasons for the high prices in New Zealand. Lowering fuel will be beneficial to society because many people will afford the commodity. This is likely to trigger economic growth. The government should examine whether petrol firms are inflating prices so that they can establish strategies like subsidizing to lower costs.

References

Taylor, M. (2019). Principles of Economics; Volume 1. Creative Media Partners, LLC.

Bohi, R.D. (2013). Analyzing Demand Behavior: A Study of Energy Elasticities. Routledge.

Walls, J. (2018, October 8) 'Consumers, in my book, are being fleeced' - PM Jacinda Ardern on petrol prices. NZ Herald. Retrieved from: https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12138957

Palmer, S. & McCann, M. (2019, May 1) Why fuel prices could be about to rocket for New Zealand motorists. New hub. Retrieved from: https://www.newshub.co.nz/home/new-zealand/2019/05/why-fuel-prices-could-be-about-to-rocket-for-new-zealand-motorists.html