22 where along the supply chain prices or price ceilings will be set. The third is whether prices or ceilings will be uniform throughout the country or will vary by location. The pros and cons of different options are outlined in Table 6. The inability to promote price competition is one of the disadvantages of controlling price levels.

Table 6: Decision Parameters for Government-Controlled Prices

|**Mechanism**|**Advantages**|**Potentialproblems**|
|---|---|---|
|Price ceilings|Provide some scope for price competition;<br>divergence from ceilings suggests<br>emerging competition, with less need to<br>get the prices “exactly right” than<br>controlling price levels|If price ceilings are too high, there is little<br>incentive to improve efficiency. If they are too<br>low, some or all segments of downstream oil<br>may cease to be financially viable.|
|Price levels|Greater control|Same as price ceilings, and in addition there is no<br>scope for price competition.|
|Control at retail|Easy for consumers to check compliance|More assumptions are needed to calculate prices<br>than controlling prices upstream of retail.<br>Compliance is more difficult to monitor because<br>the number of points to be checked is the largest<br>at retail. In the extreme, wholesale could be<br>higher than retail (Kazakhstan).|
|Control at<br>wholesale or<br>elsewhere upstream<br>of retail|More transparent because of greater<br>correlation with benchmark international<br>prices, easier to monitor compliance<br>because there are fewer points of sale.<br>There is no need to try to estimate<br>transport costs and retail margins<br>throughout the country.|If competition is inadequate, margins could grow<br>and retail prices could be markedly higher than<br>otherwise. If upstream prices are set too low, oil<br>companies may try to recover losses by<br>increasing retail prices to compensate.|
|Uniform prices|Sense of national unity: one country, one<br>price. Easy for consumers to check<br>compliance.|Freight equalization introduces additional scope<br>for inefficiency as well as corruption. Cross-<br>subsidization could increase to the point of<br>making the cost of compliance unacceptably<br>high.|
|Pricing by location|Costs are better reflected.|Consumers in remote areas may compare<br>themselves to those in major cities and feel a<br>sense of injustice. If the cost of serving remote<br>areas is too high, some maynot be served.|

_Source_ : Author.

# **_Cost of smoothing prices_**

One of the common objectives for government control of prices is to smooth the international oil price volatility on the domestic market. There is an economic cost to price volatility, and a vast literature exists on whether it would make sense to intervene to try to reduce price volatility, particularly in agriculture. Keynes (1942) argued, “One of the greatest evils in international trade ... [is] the wide and rapid fluctuations in the world prices of primary products... It must be the primary purpose of control to prevent these wide fluctuations.” One systematic approach to smoothing oil price volatility on the domestic market would be to set the domestic price by averaging past, and possibly futures, prices over a fixed period of time. Figure 7 shows a hypothetical smoothing scheme that uses moving averages of spot prices from the previous nine months as the starting point for constructing domestic prices. The plot uses heating oil (a type of diesel) in the New York Harbor, for which both spot prices and futures