South-Western EconNews: Kuwaitis Queue and Wait

Kuwaitis Queue and Wait

Subject

Comparative Statics

Topic

Equilibrium

Key Words

Oil Prices, Revenues, Inflation, Stock Market, Deficit, Income Tax, Interest Rate, Waiting List, Charges, Price

News Story

Kuwait, located on the Persian Gulf, has the fourth-largest oil reserves in the world. Oil prices tumbled from $26 a barrel in January 1997 to below $12 in late 1998, although they have recovered to $15 a barrel now. Oil revenues have fallen over 50 percent. U.S. inflation is lower due to the oil price plunge.

Life in Kuwait is heavily dependent on oil revenues. The stock market has fallen. Oil producers have gone out of business, merged, or laid people off. The government is running a deficit, and the social services and entitlements provided by the government are becoming endangered. Currently, health care and education are free, electricity and water are nearly free, jobs with the government are virtually guaranteed, there is no income tax, and mortgages up to $220,000 are free or are provided at a low interest rate. But there is now a waiting list of 45,000 for housing, new construction projects have been cut back, and charges for driver's and business licenses have been introduced.

Increasing the price of gasoline from 40 cents to 60 cents a gallon has been debated, but there is concern for the effect on the five-car family. There is also discussion about allowing foreign oil companies into the country once more to engage in exploration and development, and to inspire innovation and reduce costs.

(Updated June 1, 1999)

Questions

1.	Draw a supply and demand diagram for goods and services in the U.S. Mark the initial equilibrium price and quantity.
	a)Oil is an input in the production process for many products. As its price has fallen, which curve has been affected? Why?
	b)What has happened to the equilibrium price and quantity of goods and services in the U.S.? Illustrate on your diagram.
2.	Now draw a diagram showing the demand for, and supply of, housing in Kuwait. Mark the initial equilibrium.
	a)Which curve is affected by cutbacks in construction projects? Draw the shift in the curve.
	b)Given that the price of housing is unchanged, show the effect of decreases in new home construction on the quantity of housing bought and sold.
	c)Mark the quantity of housing that is demanded at the existing price. What do you notice?
3.	Draw price and quantity axes for the Kuwaiti market for driver's licenses. Add a demand curve.
	a)Draw a supply curve bearing in mind that citizens could previously obtain licenses for free. Show the previous equilibrium price and quantity.
	b)Now the government is charging for licenses. Add a new supply curve showing that all licenses can be purchased at a price of $30. Mark the new equilibrium price and quantity.
	c)The government intends to raise revenue in this way. Shade in the new revenue earned by charging for licenses.
4.	Draw a supply and demand diagram representing the market for automobiles in Kuwait. Show the initial equilibrium.
	a)The price of gasoline may be raised. What kind of good is gasoline in this market?
	b)On your diagram, show the effect of higher gas prices on the curve(s) and the equilibrium price and number of automobiles traded.

Source

David J. Lynch, "Pampered Kuwaitis in for rude awakening", USA Today, March 22, 1999.