Question

1. Is the gas market a perfectly competitive market? Why or Why not?
2. What is the cause of these high prices? Are oil companies to blame? Is the government to blame? Should we enact price controls on the market?
3. What can we do to combat the high prices

Answer 1

Part A)

The gas market is not a perfectly competitive market as there are only few producers of the good and most of them have formed alliances with one another to regulate the prices of natural gas and to allow for higher profit margins for themselves. The market type is said to be an oligopoly as the barriers to entry are extremely high. Only a few countries are competent enough to produce gas and therefore they have can fully control the prices of the same.

Part B)

The core reason as to why gas is expensive is that there are only a few producers of a good that is used worldwide. The governments need to import gas from oil rich countries which are mostly located in the Middle East. Further, taxation of the same by governments to be able to spend on infrastructure development, healthcare etc is also a reason for the higher pricing.

In my opinion it is not recommended to enact price control on a commodity that is scarce and would not be available for a long period of time. Subsidising natural gas can cause long term problems for the economy as it is usually an imported commodity for most countries. Having price controls would cause the government to spend a lot of money to keep prices low and subsidize the rates. When international rates are high governments cannot spend a lot of money from their pockets to keep prices stable.

Part C)

The only method to combat high prices in this situation is to search for alternative sources of energy. In fact, most countries are expanding their expenditure on renewable technology such as solar and wind power as it helps both the environment and fiscal policies to be set in in a good way and manner.

Please feel free to ask your doubts in the comments section if any.