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Microeconomics help please

Thank you MagicNMedicine for the clarification
(edited 13 years ago)
Well say standard gasoline costs $100 (per whatever amount)
California refined gasoline costs $108-112

If people can import gasoline from other states then they will get that as its cheaper than California refined gasoline.

So the California refiners want a surcharge put on it so that they can't be undercut.

Imported standard gasoline (with the surcharge) now costs $115

So in normal times nobody will buy the imported surcharged gasoline, they will just buy California refined gasoline at $108-112

But in bad times say California refined gasoline goes up to $125, people will import standard gasoline instead, and pay $115 for it.

What the surcharge means is effectively it puts a ceiling on what consumers in California will need to pay - the price of standard gasoline in other states plus $15. Without that if there was just a straight ban on imports, they would be at the mercy of prices of California refined gasoline, and if that went up to $125 they would just have to suck it up and pay it.

But the surcharge also means that in normal times, as long as the California refiners can keep the prices below $115, thats what people will buy. So it gives the California refiners an advantage in being able to sell to the local market, but it stops locals from being faced with very high price spikes, should anything bad happen in the California refined oil market.

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