Why gasoline price in Mexico should be higher?

The price of the gasoline in Mexico has always been an important topic for the media, as it is now for political parties as we approach the presidential election. Some people argue that increasing the price of gasoline would hurt the already struggling households in the country. While this is true, the opportunity cost is higher, and the impact on low-income families is very small. As an international comparison, Mexico ranks 48 out of 57 in the ranking of prices of gasoline, according to Bloomberg (http://goo.gl/1epIJ), in which #1 is the most expensive. In the list, there are several countries that are poorer than Mexico (in GDP per capita terms), and that have higher gasoline prices, such as India, Brazil, Bulgaria and China, just to mention some examples.

Regarding the wealth effect argued by some people, Mexican families on average use only 5% of their total spending in electricity and fuel. Furthermore, while the poorest population deciles spend a bigger share than the richest (Figure 1), the VI-X income deciles spends twice more than the I-V deciles (Figure 2).

Another interesting fact is that, according to the World Bank, there were only 276 cars for every 1000 habitants in Mexico in 2009. This suggest that most of the spending of low-income families goes towards domestic use fuel. All of these, point to the well-known fact that this kind of subsidy is highly regressive, and that its existence in a poor country like Mexico is very difficult to support.

While it is true that there exist negative effects by an increase in the price of fuels in the economy, savings coming from a free-floating price of gasoline would over-compensate the costs. In 2011, Mexico spent around 170 billion MXN (Mexican pesos) subsidizing gasoline. This amount represents about 5 times the budget of the UNAM, 5/4 times the total household spending in public transportation, and 3/16 of the total spending of households in food, beverages and tobacco. What’s more, because of the price difference between US and Mexico, some of the subsidy goes to the US, as some drivers come to Mexico to fuel their tanks (http://goo.gl/Ujt5Y).

Last but not least, by subsidizing gasoline prices, the government incentivizes the use of non-eco-friendly fuels, when Mexico has a long history of pollution issues.

*This piece constitutes a short preview into the topic. We must not forget that there are multiple influencing factors that offer further insight and dimensions to the analysis. Comments are more than welcome.