Question

Please use logical and rational arguments grounded in economic and financial theories to answer this question. I am not looking for political rhetoric nor unfounded statements. Use only credible & reliable academic sources, well respected think tanks, institutions and publications(examples are: Brookings, Federal Reserve, Harvard Business Review, American Management Association, Economist, Financial Times, Wall Street Journal, Forbes – DO NOT USE Fox News, CNN or any other .com source or blogs).

Burning fossil fuels such as coal, gasoline petrol, heating oil release greenhouse gases containing pollution into the atmosphere, contributing to global warming in addition to the natural weather cycle. While this course is not meant for discussing the sources of global warming, we will explore a situation of government measures to mitigate the impact associated with the negatives effects. One measure will be to impose a tax – pollution tax on the pollution content in fossil fuels.

When governments impose pollution taxes on gasoline, there are implications not only to consumers/users but also the industry. Managers of firms that sell gasoline such as Exxon – Mobil or Chevron may need to think about how much of the tax they have to absorb eating away their profits and how much they can pass through to retail firms and consumers who buy gasoline. Similarly, managers of gasoline retail firms such as Allon or QT that purchase gasoline must consider how any pass-through analysis is critical in making short-run managerial decisions concerning how much to produce, whether to operate or shut-down, and how to set prices and making long-run decisions such as whether to undertake capital investments.

During the 2012-13, U.S. federal government budget negotiations, several Congressional leaders called for pollution taxes to also help balance the budget. Such taxes may harm some industries while helping others (rationing and guiding functions from Ch. 3), in addition to the social/environmental objective.

Using concepts from Chapters 3 (rationing and guiding functions), Chapter 4 (elasticities), Chapter 5 (Forecasting), Chapter 7 (economies of scale) and drawing your previous knowledge of capital budgeting besides scholarly resources listed above, answer the following questions:

1. What changes are likely to result in the product mix of automobiles?

2. What do you think some of the industries and related industries which are certainly going to get hurt? Which nascent or potential industries may actually benefit as consumers look for alternatives to satisfy their energy needs?
3. What factors should the alternate producers take into account for their future production and investment purposes?
4. What factors will producers/retailers of fossil fuel should take into account to make production/investment decisions

Answer 1

Introduction:-

In a fast paced environment, in which government policies towards managing business are changing rapidly, and the world has already extracted a lot of petroleum for use by end consumers, the world requires active policies to tackle both the problem of pollution & global warming on one side and on the other use of other renewable resources for self-sustenance so that our upcoming generations do not suffer because of our actions.

As a result, many governments across the globe have advocated for structural changes to be made, and have even advocated taxation of polluting industries to allow for more funding for renewable ones which would feed the energy demanding industries and consumers while at the same time would not lead to major harm for the society respectively.

Case Specifics:-

What changes are likely to result in the product mix of automobiles?

In such circumstances, in which there is likely to be higher taxation on polluting automobiles, the product mix will rapidly change. Even today, major car brands across the globe have shifted their focus to electric car manufacturing which has seen rapid development particularly by the brand Tesla which has introduced new technology in the market which will heavily reduce the tax liabilities for both consumers and the company as a whole respectively.

The resultant would be that companies would alter their automobile offerings, and are more likely to develop and pitch for vehicle types which are relatively different from traditional types in the kind of pollution they do. These could include solar powered devices or electric ones which tend to pollute much lesser than petrol or diesel options. Further CNG (Compressed Natural Gas) options can also see a spike.

Thus, the overall change in the product mix would see a decline in traditional offerings and newer ones taking its place respectively.

2. What do you think some of the industries and related industries which are certainly going to get hurt? Which nascent or potential industries may actually benefit as consumers look for alternatives to satisfy their energy needs?

The petrochemical industry, and the lubricant making industry which primarily cater to the needs of traditional vehicle owners by supplying them with resources required for maintenance and supplies to traditional vehicles will face tough pressure because of the high costs they are more likely to face in the presence of active taxation laws.

Further, spare parts as an industry will be impacted since the demand for traditional car and their components would therefore decline because of active taxation.

Industries which are currently nascent such as solar powered vehicles, electric vehicles etc. would largely benefit from such exercise. Companies such as Tesla have long proven that companies can create offerings which lead to lesser pollution, provided the funding is enough to support their technological drive for innovation respectively. Such alternatives would gain demand and therefore as an industry would grow rapidly respectively.

2. What factors should the alternate producers take into account for their future production and investment purposes?

Alternate producers, which refer to those that do not use traditional fuel or do not lead to pollution directly, should be aware that governments can also tax manufacturing processes and other indirect pollution which they may cause in the manufacturing process of equipment or vehicles. Thus, taking a broader view of the situation is extremely important.

Future production must include newer technology to reduce emission and cause lesser damage to the environment, however it must also take into account the practicality of such devices, as they should be user friendly for both earning profits and retaining customers respectively.

Only a combination of the above listed factors and active management, can lead to formation of industries which can replace traditional automobile sector.

2. What factors will producers/retailers of fossil fuel should take into account to make production/investment decisions

Retailers of fossil fuel have already begun facing the heat because of active government control in the sector and the active search for alternatives would make it even tougher for these operators to function.

Even though, fossil fuel industry cannot be eliminated so quickly, their end use is most likely to change from end to end consumer use, to institutional and necessary usage in a few years to come.

Therefore, while making an investment decision, producers or retailers should today be prepared for a sharp decline in demand pattern, since more and more consumers are more likely to switch from traditional use of fossil fuel because of increasing prices, taxation and other similar factors respectively.

As such, having a backup plan is extremely necessary for such producers or retailers.

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