Transaction costs impact businesses and economies all over the globe. It is defined as the cost of operating within a market, or “the costs, other than the money, that are incurred in trading goods or services”, including, but not limited to the cost of information. Information is indeed power in all respects. The right information, in the right hands, at the right time, can reduce the impacts of moral hazard and adverse selection in business and economic operations.
The Nigerian Government in 2011, publicized the consideration of a proposal to eliminate fuel subsidy from its annual budget. As expected, this proposal has been the subject of critical analysis and discourse, on both television and radio talk shows, social networking sites, and most recently, the National Assembly. One major issue, worsening this Nigerian quagmire of policy and decision making, is the availability, veracity and integrity of information.
It remains unclear to Nigerians what the estimated daily demand of PMS is. How much do we consume each day? What part of this demand is produced and supplied locally? What is the short-fall quantity that requires importation? What quantities were actually imported and paid for? Were quantities verified? It further remains unclear what the actual (sunk) cost of fuel subsidy for 2011 is – N1.3 trillion? N1.5 trillion? or what? The definition of fuel subsidy in itself seems to appreciate in vagueness by the day.
In this regard, and with the available information on current PMS retail price, current landing cost and ex-depot price (via PPPRA website), a scenario analysis has been run, with a permutation of numbers, in an attempt to demystify the concept of fuel subsidy and the method of evaluating its cost to government.
The analysis is seen here: The Arithmetic of Fuel Subsidy