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The oil wells of Borlandia produced so much oil that the

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The oil wells of Borlandia produced so much oil that the [#permalink] New post 27 May 2012, 09:52
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The oil wells of Borlandia produced so much oil that the market was overwhelmed; consumption did not keep pace with production. As a result, oil prices fell. The government of Borlandia attempted to support oil prices through a subsidy scheme: oil producers who voluntarily limited the amount of oil they produced were compensated directly by the government up to a specified maximum payment.

The program instituted by the government of Borlandia, if successful, will not be a net cost to the government. Which of the following, if true, is the best basis for an explanation of how this could be true?

A Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

B Oil production in countries other than Borlandia declined in the same year that Borlandia's government instituted the compensatory scheme.

C In the first quarter after Borlandia's government instituted the compensatory scheme, oil production declined 8 percent.

D Because the government specified a maximum subsidy payment per oil producer, those producers with numerous wells in production received less support per well than those producers with fewer wells in production.

E Oil producers desiring to qualify for the compensatory scheme could not continue to produce oil and simply withhold it from the market.
[Reveal] Spoiler: OA
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Re: The oil wells of Borlandia produced so much oil that the mar [#permalink] New post 27 May 2012, 18:25
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The govt pays a subsidy to the oil producers to get them to produce less oil and raise oil prices. How can the govt's expenditure be offset by a corresponding gain?

Look for an answer choice here that mentions govt revenues - without doing that, we cannot explain how the govt can offset its expenditure.

Option A is the best choice here - it explains how a rise in oil prices through the govt action will lead to a rise in producer incomes, which in turn will lead to an increase in govt taxes. The govt's expenditure in giving out the subsidy is therefore offset through increased taxes.
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Re: The oil wells of Borlandia produced so much oil that the mar [#permalink] New post 28 May 2012, 20:51
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macjas wrote:
The oil wells of Borlandia produced so much oil that the market was overwhelmed; consumption did not keep pace with production. As a result, oil prices fell. The government of Borlandia attempted to support oil prices through a subsidy scheme: oil producers who voluntarily limited the amount of oil they produced were compensated directly by the government up to a specified maximum payment.

The program instituted by the government of Borlandia, if successful, will not be a net cost to the government. Which of the following, if true, is the best basis for an explanation of how this could be true?



A Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.CORRECT - If production reduces then there will be no excess. The price will be at normal levels again increasing the income of the producers. This will increase the taxes paid to the government

B Oil production in countries other than Borlandia declined in the same year that Borlandia's government instituted the compensatory scheme.INCORRECT - This does not provide the explanation

C In the first quarter after Borlandia's government instituted the compensatory scheme, oil production declined 8 percent.INCORRECT - Just a fact. Does not help us understand why this decision will not lead to an increase in the cost for the government

D Because the government specified a maximum subsidy payment per oil producer, those producers with numerous wells in production received less support per well than those producers with fewer wells in production. INCORRECT - Does not help us understand why this decision will not lead to an increase in the cost for the government

E Oil producers desiring to qualify for the compensatory scheme could not continue to produce oil and simply withhold it from the market.INCORRECT - Does not help us understand why this decision will not lead to an increase in the cost for the government
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Re: The oil wells of Borlandia produced so much oil that the [#permalink] New post 26 Jan 2014, 12:27
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Re: The oil wells of Borlandia produced so much oil that the [#permalink] New post 01 Feb 2014, 07:18
The program instituted by the government of Borlandia, if successful, will not be a net cost to the government. Which of the following, if true, is the best basis for an explanation of how this could be true?

THE GOVERNMENT IS PAYING SUBSIDIES YET IT IS NOT INCURRING LOSSES......MEANS THAT SOME SOURCE OF GENERATION OF FUND IS THERE......IF OIL PRICES INCRESE THERE WILL BE MORE TAX GENERATION DUE TO INCREASED PROFITS AND INCOME INCREASE....

A Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.CORRECT......TAX INCREASE WILL TAKE PLACE WITH THE NEW ARRANGEMENT.....LEADING TO NO NET LOSS TO GOVERNMENT
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Re: The oil wells of Borlandia produced so much oil that the [#permalink] New post 31 Mar 2014, 22:44
I am not able to understand that how govt revenue is increasing as per following statement.

Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

Overall taxes paid by oil producers is decreasing and thus, govt will face revenue loss in taxes. We can assume that govt can compensate these losses through increased sales tax on increased market price of oil, but it is not explicitly stated in the argument.

I am not able to understand the part of cycle in context of option A, in which govt is making money.
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Re: The oil wells of Borlandia produced so much oil that the   [#permalink] 31 Mar 2014, 22:44
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