On the cost of the gasoline subsidy from SIC can be downloaded here – courtesy of GEHA and a scanner. (Don’t worry, the PDF is virus-free.) (No idea what this is about? Check out the controversy in the previous thread.)
To my mind, Juan’s criticism is right. Oliveros and Sifontes do a pretty good job breaking down the subsidy and explaining how Iran dealt with a similar situation…then follow it all up with a policy recommendation that’s not really grounded in their research, but rather on an arbitrary estimation of what “seems” politically feasible:
Nuestra propuesta inicial sería, en un primer momento, llevar el precio al costo de producción en un plazo no mayor de tres años. Adicionalmente, mientras se ejecuta esa primera reforma, debería darse una gran discusión nacional sobre bajo qué parametros se debería fijar el precio en el futuro.
There are a couple of problems with that. First of all, why three years? Why not one, or four, or seven? It’s a purely seat-of-the-pants judgment.
The bigger problem is that if you announce that your policy, “initially, at first” is to bring the price of gas into line with production costs, you’re priming people to think that that’s a “fair” price, and once you’ve finished doing that, you’ve addressed the problem.
You are, in other words, contributing to the confusion that gave rise to Tovar’s mangled article in the first place, and establishing the wrong metric in the public’s heads. Cuz I can just imagine the outrage in 2015, “bueno, ya nos dijeron que habían subido la gasolina a su costo, y ahora encima quieren subirla diez veces más!!”
8 thoughts on “The original paper by Luis Oliveros and Domingo Sifontes”
If the authors throw the concept of opportunity cost under the bus and minimize its importance, can we blame the journalist for doing the same thing?
Well, they don’t quite do that – the first five pages of their article is an extended meditation contrasting the Accounting Cost and the Opportunity Cost. Partly, what they’re saying is “all the analysis we’ve had so far shows the massive, sprawling opportunity cost involved – our analysis shows that, in addition to that, the sale price no longer even pays PDVSA’s cost of production and distribution.”
But this policy recommendation at the end is definitely unfortunate.
It’s an exercise in muddying an issue that didn’t need muddying!
ElUniversal Economía @EUEconomia
#LoMasLeido hoy en @ElUniversal Pdvsa perdió $2.197 millones en subsidio a la gasolina desde 2005 http://ow.ly/crCva
I wonder if #LoMasLeido is thanks to Caracas Chronicles…? Ja, I doubt it.
I wouldn’t bet on it, though it is possible, that by initial proposal they meant that a later proposal may suggest a higher price for the first moment, or if by first moment they implied that they already had a phase 2 of higher prices even as early as their initial proposal.
Also, again, where does one draw the line for opportunity cost: What could Iran be like today if it had all been optimized? That’s the extreme opportunity cost.
Where does one draw the line for opportunity cost?
Easy. The FOB price. Iranian law now uses the Freight-on-Board price of Iranian oil as a legally binding benchmark: after a 5 year phase-in period, gasoline cannot be sold for less than 90% of FOB. That’s just one of the many fascinating insights in the original paper: give it a go!
Oh, but that’s my point exactly, that there are many places to draw lines, defendably good lines. Iran chose that one, which you seem to like, but sometime in the future a Quico 2.0 will be writing a post on the 90%FOB having an opportunity cost and how is it that economists of Iran couldn’t see it. Any economic policy that deviates from free, competitive market pricing has an implicit opportunity cost. By setting 90% of FOB as the benchmark, they are guilty of the very thing Juan stated earlier, that the minds will now be set to never pay 100% market price, or worse that FOB defines international market prices (can you think of a reason this could go wrong?).
You stated earlier: the point isn’t what policy to set, or what economic stand is correct, the point is people’s incapacity to rationally debate. In this case you’re guilty of what you criticize, especially obvious with the regressiveness of the spending of the oil money in VE.
Ah, and control the damn inflation too.
Else the complain “bueno, ya nos dijeron que habían subido la gasolina a su costo, y ahora encima quieren subirla diez veces más!!” will be heard ad infinitum and not only about gasoline prices. You will have to understand the complainers, inflation will have made them much poorer and unable to pay anything not grossly subsidized. Dependent.
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