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    Fund to stabilize the price of gasoline in the local market

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    To prevent gasoline prices from having devastating effects on the economy it has been proposed that all gasoline prices in the United States be fixed at the average price for the last two years. For simplicity it will be assumed that this price is $2.50 per gallon. When equilibrium prices are under $2.50 per gallon the excess payments will be kept in a government fund. When retail prices exceed $2.50 per gallon money from this fund will be distributed to pay the difference. Do you think that this plan would help the economy? What effect would the plan have on the supply and demand curves? Would gas stations and oil companies be able to stay in business?

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    Solution Preview

    The fund that you might be referring would be a "buffer" fund the purpose of which is to soften the effect of oil price fluctuations in the world market.

    This strategy have been used in some Asian countries calling this fund as "Oil Price Stabilization Fund (OPSF)".
    This plan failed. And this is doomed to fail.

    What will happen is that the strategy will be a burden to the government. Oil price keeps on increasing at a constant rate, it never goes down. As can be observed, an ...

    Solution Summary

    This solution looks at the option of using a special fund to remedy the price fluctuation of gasoline in the market. Examples of the use of the fund were stated here.