Did price controls increase, decrease, or have no effect on U.S. oil production during the 1970s?
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Can the Law of Supply Be Repealed for the Oil Market? The United States experienced two oil shocks during the 1970s in the aftermath of Middle East tensions. Congress said no to high oil prices by passing a law prohibiting prices above a legal limit. Supporters of such price controls said this was a way to ensure adequate supply without allowing oil producers to earn excess profits. Did price controls increase, decrease, or have no effect on U.S. oil production during the 1970s? |
Here is a tip:
Higher prices help in incurring the high opportunity cost due to increase in profit and they supply higher quantity of the product.
Explanation
The supply shocks in the middle east will raise the cost of oil production in the Country U. At higher cost of production, the producers will tend to increase the prices but the price control will prohibit them to do so above a legal limit. Thus, the increase in the cost of oil production and restriction on the price increase above a certain limit will reduce the incentive for oil producers to produce.
As the incentive for oil production declines due to price controls, the producers will decrease the oil production. Therefore, there will be less supply of oil.
Verified Answer
The oil production decreased in country U due to price controls during 1970s.
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