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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]

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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]

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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]

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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]

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Re: The oil wells of Borlandia produced so much oil that the [#permalink]

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New post 01 Feb 2014, 08:18
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]

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New post 31 Mar 2014, 23:44
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]

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New post 03 Oct 2014, 15:02
PiyushK wrote:
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.


Piyush,

The stimulus says that this new plan will not be a net cost to the government; this means that government will not be in loss, not necessarily will make profit.

Option A shows that by maintaining previous levels of oil prices govt. will at least start earning the earlier level of taxes, which will make sure that govt. is not in loss.

I hope this clears out the doubt.

Thanks,
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Re: The oil wells of Borlandia produced so much oil that the [#permalink]

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New post 21 Jan 2016, 05:58
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

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Re: The oil wells of Borlandia produced so much oil that the [#permalink]

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New post 23 Sep 2016, 07:14
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.

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.


Only A makes perfect sense. Government makes more $ from taxes, received from income of the oil producers, than it gives out in the form of subsidies. Less oil on the market, price is higher - greater income (tax $$) + from the sales of the oil, either VAT or sales tax is collected - so double win for the government.

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Re: The oil wells of Borlandia produced so much oil that the   [#permalink] 23 Sep 2016, 07:14
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