Paper Topic:

Economics

Theoretical Application of Taxes and Cartels

in the Experience of OPEC (name (school

Theoretical Application of Taxes and Cartels in the Experience of OPEC Page 1

Competition can make wonders in the economy . The best human activity like the best record in the 100-meter dash in the Olympics can be brought out in a spirit of competition . The best shoes can be produced in the market if there is fair competition among the shoe producers Fair competition can make wonders both in human activities and in the market system . However , it

is also interesting to learn the characteristics of a market where there are only a few players

The world has seen the best example of the oligopoly , and this will be discussed later in this . Because there are only a few players in an oligopoly , producers tend to collude with each other rather than depend on their independent action . A cartel , or a formal organization of the producers within a given industry , is an example of perfect collusion among sellers in an industry . A good example of this is the Organization of Petroleum Exporting Countries (OPEC . Its effectiveness can be gleaned from the fact that it was able to increase the price of oil substantially , thus giving benefit to the OPEC

This cartel hits the headlines in the late 1973 when its members precipitated a crisis in the United States and the rest of the world by announcing its cutback in oil exports . Then it attracted further attention by taking a series of actions resulting in every large increase in price of crude oil . For example , the price of Saudi Arabian crude oil jumped from about three US dollars in 1973 to over ten US dollars in early 1974 to about 30 US dollars in 1983

OPEC consists of twelve major oil producing countries , including Saudi Arabia , Iran , Venezuela , Libya and Algeria . The OPEC countries impose and excise tax of so many cents per barrel . These taxes are well publicized and like any excise tax , they are treated as a cost of production by any of the international oil companies . Thus , by increasing these taxes , the OPEC countries can increase the price of crude oil , since no company can afford to sell oil for less than its production costs plus the tax

Theoretical Application of Taxes and Cartels in the Experience of OPEC Page 2

How far are they likely to increase the price ? According to a model , one would expect the OPEC cartel to push the crude oil price up toward the monopoly level , since this would increase the tax revenues

Cartels , in to be successful and effective , must possess the following characteristics (Machlup , 1962 : 363-365

All producers or sellers in the industry are included in the agreement

The agreement is definite and enforceable on all parties to it

It covers both the price to be charged and the quantity of output to be produced by each agreeing seller , the output allocation being calculated as to...

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