Deadweight Loss of Alternative Energy Pricing Policy (in Thai)

When a market for biodiesel B5 occurred in 2006, the government set a retail price for biodiesel B5, which was subsidized by oil taxes and the oil fund of high speed diesel. This paper evaluates the economic loss from such cross-price subsidy policy. The variation in demand and supply in the markets of high speed diesel and biodiesel B5 was estimated to calculate a deadweight loss. The model obtained was then used for a model simulation to find the optimum pricing policy. Time series data from February 2007 to January 2011 were used. The study shows that the cross price subsidy generated a deadweight loss of 11,497 million baht within a 4-year period. The loss mainly occurred in the high-speed diesel market. The result of the simulation supports a continuous collection of fuel tax, but not a cross price subsidy. The tax must be collected in accordance to a social cost of externality from fuel consumption. The function of the oil fund should be to maintain the stability of retail price levels only. Government should monitor the tax rates in the way that makes the proportions of retail price and cost of the two fuels equal. This would avoid the loss.