Micro Foundations of Markets and Behavior

You are an economist, and part of an inter-disciplinary team set-up within the purview of the office of the Romanian Presidency. Thus your focus should be on the situation as it impacts on Romania only.

Your task, within the inter-disciplinary team, is as follows:

Part A

To evaluate (graphically and in words, no calculations necessary) the impact of the following policy option: Reducing tariffs on imported oil and gas by 50% in order to reduce the cost of living for Romanian consumers (note that while Romania produces oil and gas, it still has to import a certain amount). Comparing to the situation when the tariff was higher, note the impact this would have on Romanian consumers, Romanian producers, Romanian government revenue and also on efficiency.

Find a historical case (anywhere in the world) where a reduction on import tariffs (not necessarily on energy) was enacted to make a product more affordable and accessible to the public, and summarise the effectiveness (or ineffectiveness) of the policy. Note why it succeeded (or failed), and how it could inform how effective (or ineffective) the theory you have presented in part (i) could be.

Part B

Upon reporting your evaluation to your inter-disciplinary team members, you begin to receive feedback from other disciplinary perspectives. One particular strong objection to the price control on fuel comes from the team member with a background in welfare studies, who points out, in particular, the need to meet Sustainable Development Goal (SDG) 1.2: By 2030, Reduce at Least by Half the Proportion of Men, Women and Children of all Ages Living in Poverty in all its dimensions according to national definitions. He points out that if Romania reduces import tariffs then government revenue falls, leading to less funding for poverty alleviation programs.

Given your analysis in Part A, consider the strengths and weaknesses of concentrating just on economic theory alone when formulating policy on Romania’s reduction of import tariffs on fuel. How does economic theory help policymakers with energy policy, and what are its limitations?

Your team members and you agree to formulate an energy policy that can help alleviate extremely high energy costs for Romanian consumers in the very short-term (the Northern Hemisphere winter is quickly approaching) that accounts for both economic theories and/or models but also one (or two, if you prefer) theories and/or models from another discipline (or disciplines) that can produce a policy recommendation that is superior to what you highlighted in Part A(i). Briefly highlight this policy, and note how it is a better policy than the one you initially proposed.