Chapter 3 Government Interventions in the Free Market System

http://mises.org/story/389

Summary

The article I read about is from the Daily Arcticle by Mark Brandly. This article talks about the reason for the huge increase in oil prices and solutions to decrease oil prices. In truth, the government is responsible for the high cost of oil. The article states that there is too much government involvement in the oil industry. OPEC responded with price controls, heavy taxes, and massive government meddling in energy markets in the past to keep prices down. As a result, producers produce less oil which becomes insufficient to meet the demand causing oil prices to increase even more. This time, OPEC decided to decrease regulations and taxations for oil producers. By doing so, it makes oil production more profitable and will increase production driving oil and fuel prices down. Generally the article states that government involvement drives up prices and creates inefficiencies in oil production. The solution to decreasing oil prices lies within tax cuts and less regulations on oil producers since such actions drives them to produce more for a greater profit could be obtained.

Connection

I believe the connection of this article to our text is the effects of government intervention in the free market. In this case, too much government involvement in the oil industry caused the price of oil to increase over the past years. OPEC has always manipulated the oil price market. As a result, a price ceiling situation has occured. In such a situation, a shortage of oil supply is created and the only way to solve the problem is to shift the supply or demand curve. This is only possible by the factors of Supply and Demand we learned in chapter 2. However, such actions will just result in further government intervention in the market which means more money needs to be spent inorder to solve the problem. Moreover, excise tax is placed on oil industries which increases the cost of oil even more. When control is established, equilibrium in the market is destroyed resulting a situation where price and quantity cannot be determined unless through further government intervention. If the government is not involve in the first place and allows the market to function naturally, such problems will not happen.

Reflection

I believe that the government has taken the correct action in reducing the taxation and regulations of oil. However, there has not been much change from the year 2000 to present day. Few months ago, oil prices were as high as $1.50 a litre. However, its only at $0.98 a litre now not due to the decrease in governement involvement, but of the poor economy at the time being. The stock market affected the economy globally. Because people have less to spend, the demand for oil and other resources decrease world wide. A decrease in demand decreases the price causing oil price to become less expensive. In truth, I believe that the government did not take any actions listed in the article to reduce oil prices during the pass 8 years. Because they want to make a profit through the heavy taxations and regulations, they didn't care about the poeple's suffering of high oil prices. All this time oil prices only increased. It proves to show that the government cannot be trusted for it is filled with empty promises. In the end, it was the free market system itself that decrease the price of oil by shifting the demand curve through hurting the stock market.