03 January 2012

The Economics of the Nigerian Fuel Subsidy

Are pretty simple. Fuel subsidies are a terrible way of transferring resources to the poor. Economists have rightly been calling for their removal for ages.

But maybe just maybe, rather than heeding the Economist magazine's call to "End them at once!", it might have been a good idea to think about the adjustment costs that might exist to an overnight doubling of petrol costs, and also to consider another way of transferring resources directly to the poor in which they might actually notice. Putting those savings straight back into the government coffers for some kind of nebulous infrastructure spending just doesn't cut it.
The Roman Catholic archbishop of Abuja and former head of the Christian Association of Nigeria observes that the subsidy is a tiny resource transfer to the Nigerian people, who otherwise receive little or nothing from the current political economy. It is, therefore, morally justified, “no matter what the World Bank says.” (via John Campbell)
Oh economics, and your Kaldor-Hicks efficiency...

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