Case Study: Petrol price regulation in South Africa In South Africa, government has intervened in and/or regulated marke

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Case Study: Petrol price regulation in South Africa In South
Africa, government has intervened in and/or regulated markets
involved in the manufacture, distribution, and retailing of liquid
fuels in various ways since the 1930s without providing formal
reasons for doing so. By 1998, the White Paper on Energy Policy
referred to ‘a labyrinthine set of regulatory controls’ (RSA 1998:
5). While the instruments used have changed over time, the evidence
suggests that the primary reason for market interventions has been
to support investors in various parts of the value chain. This has
been achieved by limiting competition. To a lesser extent, there
has been a wish to protect motorists from excessive pricing. In
addition, over time social policy objectives have become entangled
in petrol price regulation. These relate to the promotion of small
businesses and job creation. More recently, Black economic
empowerment has been added to the list. This mixture of reasons has
made it difficult for government to implement its policy of
deregulation. Petrol was the most important liquid fuel in South
Africa for many years. Interventions in the petrol market have had
knock-on implications for the prices of diesel, illuminating
paraffin, and liquefied petroleum gas (LPG) and their control or
regulation. Petrol price control or regulation has been intimately
bound up with the structure of the industry and in particular the
proliferation of retail outlets, or what are colloquially known as
‘service stations’ despite the fact that they ceased to be places
where motor vehicles were serviced many years ago. The number of
service stations and their size have implications for employment in
the sector, a sensitive topic in South Africa due the enduring high
levels of unemployment. In the South African downstream petroleum
sector, there are elements of the value chain that have natural
monopoly characteristics, such as import terminals and pipelines
that warrant economic regulation, while there are others that do
not, such as refineries, some storage facilities, wholesaling, and
retail outlets. This mixture of characteristics contributes to the
often robust debate about price deregulation in South Africa. The
implications for any reform include at least the need to educate
key stakeholders about the different parts of the value chain and
which elements warrant regulation and which do not
Question 3
With the aid of a fully labelled diagram, explain the welfare
costs of minimum price fixing for petrol set above the equilibrium
price (10 marks)