Fuel prices go upRwanda Utilities Regulatory Authority (RURA) on Tuesday released new fuel tariffs in the country, indicating a slight increase in pump prices which took effect Wednesday.By Elis©e MpirwaPublished: January 10, 2018 Rwanda Utilities Regulatory Authority (RURA) on Tuesday released new fuel tariffs in the country, indicating a slight increase in pump prices which took effect Wednesday.According to a statement signed by RURA director-general, Patrick Nyirishema, the pump prices in Kigali have gone up to Rwf1,042 per liter and Rwf1,005 for petrol and diesel respectively.
The new prices represent an increase of Rwf11 for each litre of either petrol or diesel going by the prevailing prices that had been set at the beginning of November. Sections of the article that have been used in this commentary have been highlighted.RURA, Rwanda Utilities Regulation Authority announced tariffs increase of fuels by RWF11 per liter each. Since that is the increase, before petrol was RWF1031 and diesel was RWF 994.
According to (1) demand law, the quantity of a good demanded falls as the price rises, and vice versa ceteris paribus the demand of fuels will fall in the short run because there is not enough disposable income for the consumers to afford fuels like they did before the prices increased.
Demand will decrease as the prices increase wrestling with abundance of (2) supply, the willingness and the ability of the petrol and diesel producing firms to produce a given quantity of petrol and diesel at a given price over a given period of time, ceteris paribus.
This however will not stop the suppliers from making profits because they are selling the less quantity demanded at high prices therefore making more profit. Profit increase allows more production of fuels but there is a decreased demand, suppliers might then reduce their workforce because less fuel is demanded, leading to a high unemployment rate in Rwanda which forces the government to create more jobs to avoid crimes that can be committed by the unemployed looking for their needs fulfillment, hence consumers will be affected the most by demand decrease than the suppliers.
However, fuel as a merit good has a slight decrease in the quantity demanded when prices rise and because their demand is inelastic, even if the prices are high, transportation will not stop because people need to move from/ to places. And since diesel and petrol are substitute goods, some consumers will switch to diesel because it is cheaper, when that encounters demand (1) Blink Jocelyn, Dorton Ian, Economics course companion, Oxford University press 2012, Chapter 2, Demand and Supply, Page 19(2) Blink Jocelyn, Dorton Ian, Economics course companion, Oxford University press 2012, Chapter 2, Demand and Supply, Page 27of diesel becomes more elastic, (3) elastic demand is when a change in price or other factors have a big proportionality effect on the quantity consumers want to buy.
Effect of a decrease in demand Prices of SupplyFuels (RWF) Pe2 Pe1 A B C D2 D1 0 Q2 Q1 Q3 Quantity of fuels (liters)Before any price changes Q1 of fuels was Pe1 RWF per liter. Because fuels are essential products for transport and their demand is inelastic. A rise in the price from P1 (RWF 1031 for petrol and RWF 994 for diesel) to P2 (RWF1042 for petrol and RWF1005 for diesel) will lead to a proportionally slight decrease in the quantity demanded from Q1 to Q2 (a shift to the left). This is because the consumer’s disposable income will now be used to purchase fewer liters of fuels compared to when prices were low, since there is not enough disposable income for the consumers to afford fuels like before the prices increased, there will be a fall of (4) demand, the willingness of all people who use engines to purchase the given amount of diesel and petrol at a given price over a period of time ceteris paribus. Since the demanded fuel will slightly fall, and (3) Blink Jocelyn, Dorton Ian, Economics course companion, Oxford University press 2012, Chapter 4, Elasticities, Page 49(4) Blink Jocelyn, Dorton Ian, Economics course companion, Oxford University press 2012, Chapter 2, Demand and Supply, Page 18because fuels are everyday need for everyone who use vehicles with engines, the total sales gained by the suppliers will increase because instead of selling at P1 they are gaining more profit at P2, therefore the prices being raised at P2 will lead to a slight decrease in demand but that small change can be ignored since more profit is being made compared with before when the prices were at P1.
Before the price increase, suppliers were getting revenue equals to B+C, and after the price increase, the firms loses C because the amount of fuel demanded falls from Q1 to Q2, but gains A, and since box A is clearly larger than C, suppliers gain more revenue when the prices are increased. When prices increased from P1 to P2 the quantity of fuel supplied increased from Q1 to Q3 (a shift to the right). This is because increase in prices gives more profit to the firms which act as an incentive, enabling them to produce more to the market leading to more profits that can help them expand.Fuels as demerit goods are dangerous.
When individuals drive cars, the smoke caused by fuel will pollute the air affecting the inner body of the surrounding people and damage the environment, leading to acid rain that will destroy crops, therefore hunger to Rwandans. The negative externalities of consumption of petrol and diesel Price of fuels (RWF) MSC P1 welfare loss P2 MPB Externality MSB 0 Q Q1 QUANTITY OF FUELS ( Liters) The negative externalities of fuels make the MSB less than the MPB. Because of the free market, consumers will enjoy their engines and consume at the level where MSC=MPB. They will ignore the smoke and diseases they are creating.Since it is the duty of the government to keep the population healthy, it will intervene and reduce problems caused by fuels to reduce welfare loss. They have already increased prices to encourage individuals to use public transport because they are not willing to buy the fuel at high prices. The use of public transport reduces air pollution; instead of many cars they are few in the roads transporting many people at once. By increasing prices, the government gains more indirect taxes which can be used to educate people to use less fuels, therefore shifting the MPB to the left showing the reduction in MPB. The government may not be successful however because people may sacrifice other goods for fuels. They might also start to look for other cheap sources of supply, they can go to countries where those fuels are less expensive and purchase them in large quantities illegally leading to the formation of black markets, adding to other problems the government has to solve.Bibliography: Blink Jocelyn, Dorton Ian, Economics course companion, Second Edition 2012, Oxford University press
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