Question 1.

(1/1 point)

Which of the following statement(s) regarding subsidies is/are correct? (Check all that apply)

A subsidy is a financial transfer or tax reduction from the government to a group of

individuals or households. In a perfectly competitive market, subsidies will naturally exist.
Subsidies can be used by governments to reach certain economic, political and social
outcomes.
A subsidy is a financial transfer or tax reduction from the government to a group of individuals
or households., Subsidies can be used by governments to reach certain economic, political and
social outcomes., - This answer is correct.
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Question 1.2

(1/1 point)

True or False: Graphically, the value of a government subsidy is equivalent to the difference
between the price received by producers and the out-of-pocket price paid by consumers, times
the amount sold and consumed.

True True - correct False

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Question 1.3

(1/1 point)

All of the following are types of energy subisides, EXCEPT:

Direct spending/transfers Tax breaks Price controls on energy Cross-subsidies

that charge consumers of non-energy goods higher prices A state-owned enterprise (SOE)
selling energy products at below market rates Purchase requirements of energy products
Government lending to energy companies (at below market rates) Government borrowing
Government borrowing - correct Government policies that effect the terms of access to
natural resources
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Question 1.4
(1/1 point)

Assume that the market of electricity was initially at equilibrium with perfect competition. The
price and quantities are P* and Q*, respectively. The government aims to reduce the out-of-
pocket price of consuming electricity by households to P units less than P*. To do so the
government sets a price of electricity, P, that is lower than the firm’s recovery cost, P*. Based on
the areas in the graph below, what is the amount of electricity subsidy supported by the
government?

The rectangle abcd The rectangle cdef The rectangle abfe The rectangle abfe -
correct The triangle created by points b, f and the original equilibrium.
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Question 1.5

(1/1 point)

Consider the same market for electricity and assume that two countries X and Y have the same
equilibrium specificities, except that demand is more elastic in country Y (flatter demand).
Which country is expected to face higher subsidies if the two governments decide to reduce the
price of electricity by the same amount?
 Country X Country Y Country Y - correct Neither, countries X and Y will have the
same amount of electricity subsidies. It is impossible to compare the level of subsidies in the
two countries.

Question 1.6

(1/1 point)

For a net exporter of fuel, what is the supply cost used to identify the fuel subsidy?

The cost recovery price for producing fuel. The international price of fuel (opportunity
cost). The international price of fuel (opportunity cost). - correct We cannot talk about a fuel
subsidy if the country is a net exporter. Some price between the cost-recovery price and the
international price.
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Question 1.7
(1/1 point)

Assuming that electricity is produced domestically and diesel is imported, what are the supply
costs for electricity and diesel, respectively?

The cost recovery price and international price (adjusted with transportation and distribution
costs), respectively. The cost recovery price and international price (adjusted with transportation
and distribution costs), respectively. - correct

Question 1.8

(1 point possible)

Which of the following are true regarding pre-tax and post-tax energy subsidies? (Check all that
apply)

A pre-tax subsidy reflects the price difference between the actual retail price and the supply
cost.
A post-tax subsidy relates to the negative environmental and health externalities that could
occur following the higher consumption of energy.

Question 1.9

(1/1 point)

One way to quantify subsidies is by adopting the price-gap approach. From a consumer's point of
view, this approach corresponds to:

the difference between the international price and the actual retail price paid by consumers.
the difference between the international price and the actual retail price paid by consumers. -
correct the sum of the retail price paid by consumers and the international price. the ratio
of the international price over the actual retail price paid by consumers. the elasticity
between international price and the actual retail price paid by consumers.

Question 1.11

(1/1 point)

Although subsidies declined with the collapse of international energy prices, they have started to
escalate since 2009.

In 2011, the IMF estimated that global pre-tax subsidies reached:

 US$292 billion (0.2 percent of global GDP). US$492 billion (0.7 percent of global
GDP). US$492 billion (0.7 percent of global GDP). - correct US$692 billion (1.7 percent of
global GDP). US$1.4 trillion (3.5 percent of global GDP).
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Question 1.12A

(2/2 points)

Consider the market for coal which exhibits the following characteristics:

Assuming that the consumption of coal is not taxed in the domestic market, derive the pre-tax
and post-tax benchmark prices (per short ton). Enter your answers to one decimal place.

The pre-tax benchmark price is:

 68
correct

The post-tax benchmark price is:

83.2
correct

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Question 1.12B

(2/2 points)

Now evaluate the pre-tax and post-tax subsidies (per short ton). Enter your answers to one
decimal place.

The pre-tax subsidy per short ton equals:

 18
correct

The post-tax subsidy per short ton equals:

33.2
correct

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Question 1.13

(1/1 point)

Which of the following challenges may be faced when the price-gap approach is used to identify
the size of subsidies?

Data availability (e.g., transportation and distribution margins). Results are sensitive to
the methodology used to quantify energy consumption externalities. The estimates of
corrective taxes are also sensitive to the methodology used. All of the above All of the above
- correct
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Question 1.14

(1/1 point)

Which countries have the highest pre-tax subsidies according to IMF estimates?

Middle East and North Africa region - This answer is correct.

Question 1.15

(2/2 points)

One additional way to quantify the size of subsidies is by adopting the pass-through approach. It
corresponds to absolute change in retail price over the absolute change in the benchmark price
(both in the same currency).

Assess whether the following statements regarding the pass-through approach are True or False.

A pass-through = 0 indicates that the government does not intervene in energy price setting.

True False False - correct

A pass-through less than 1 indicates that the government intervenes through subsidies or tax
exemptions.

True True - correct False

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Question 1.16

(1/1 point)

What are some limitations of the pass-through approach? (Check all that apply)

The pass-through indicator is very sensitive to the length of the period under consideration.
The pass-through approach does not take into account initial price levels. The pass-
through can sometimes be negative around an inversion of the trend in international prices.
The international price needed for the pass-through equation is generally hard to determine.
The pass-through indicator is very sensitive to the length of the period under consideration., The
pass-through approach does not take into account initial price levels., The pass-through can
sometimes be negative around an inversion of the trend in international prices., - This answer is
correct.