Question 1

As we know, petrol is made from oil. Australia's own production of oil is not sufficient for the needs of the domestic market. Consequently, much of the petrol is either imported from other countries or is produced domestically at the two domestic oil refineries in Geelong, VIC and Lytton, QLD, using the oil sourced from the global oil market. Consequently, to understand the petrol market we need to look into the global market for oil first. For the purposes of this question, we will assume that the global oil market is competitive.

Use the demand and supply model to explain how the price of oil is determined in the global market. Briefly discuss the factors that influence the supply of oil (supply shifters) and the factors that influence the demand for oil (demand shifters). Which of these factors do you think are responsible for the recent price dynamics in the oil market? Illustrate your answer on a graph, including all relevant supply and/or demand shifts and the corresponding changes in the equilibrium price and quantity.

Question 2

Using the analysis done in Q1, we are now ready to discuss the Australian petrol market. For the purposes of this question, we will assume that the domestic petrol market is competitive. Use the demand and supply model to explain how the price of petrol is determined in the domestic market. Briefly discuss the factors that influence the supply of petrol (supply shifters) and the factors that influence the demand for petrol (demand shifters). Which of these factors do you think are responsible for the recent price dynamics in this market? Illustrate your answer on a graph, including all relevant supply and/or demand shifts and the corresponding changes in the equilibrium price and quantity.

Question 3

Federal government is considering a temporary cut to the fuel excise tax to reduce the price of petrol in Australia. For the purposes of this question assume that the petrol market is competitive and that the excise tax is paid by the suppliers.

(a) Use the model developed in Q2 to predict how the proposed policy (reduction in the fuel excise tax) will affect the equilibrium in the domestic market for petrol. Illustrate your answer on a graph, including all relevant supply and/or demand shifts and the corresponding changes in the equilibrium price and quantity.

(b) Evaluate this policy from the point of view of social welfare. What the benefits of this policy? What are the costs of this policy that will be born by all members of the society? Do you think this is a good policy overall? Explain you answer.