Reference no: EM132200451

Question: In the 1960's, the federal government regulated the prices of natural gas wellheads. The regulated prices depended upon whether the well was discovered before January 1, 1961 ("old gas") or after January 1, 1961 ("new gas"). Use graphs if needed.

1. What was the political motivation for setting different prices for different "types" of gas?

2. Was there a role for price caps to increase economic efficiency in this market?

3. In fact, the regulated prices fell below the perfectly competitve price around 1978. What was the effect of the regulations and where was it felt? What groups were harmed? Do you think that consumers would have been better off it the industry were not regulated during this time?

4. What perverse incentives did the price regulations give owners of "old" gas?

5. What were the causes of allocative inefficiency resulting from the price controls? How large were these inefficiencies?

6. Based upon the regulation of natural gas wellheads, what lesson can the economist teach to the policymaker?