Manon's Econ Blog

Brazil takes off

Posted on: November 17, 2009


Brazil, in the economic crisis, “did not avoid the downturn, but was among the last in and the first out.” Its economy is based upon the exportation of oil. Both demand and supply for oil are inelastic (it is a necessity but difficult to extract from the ground).

As more people entered the market and supplied oil, the supply curved for exported oil shifted to the right (see diagram below).

As we can see on the diagram, the equilibrium quantity increased a little while the price dropped a lot. This is what happened in the short term when more suppliers entered the market.

Since Brazil’s economy is developing and needs money, the government took advantage of the inelasticity of demand to put taxes on the oil exported. This is a long term move. It is illustrated on the graph below.

On this graph we can notice the huge proportion of total revenue that the government gets (purple square). This money can then be used for the public good. As we can see, most of this tax is paid by the consumers (see graph below).

Brazil’s government is trying to improve its society, not others. Therefore, it does not matter if the consumers pay more of the tax (it is the point), because if they pay it, less tax is left to be paid by the suppliers, and they can improve.

By taxing the imported oil, Brazil’s government improved itself and its oil suppliers at the same time. It is a smart move to get out of the economic crisis.

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