Passage

Passage – 2 It is easy for the government to control State-owned companies through nods and winks. So what really needs to be done as a first step is to put petrol pricing on a transparent formula — if the price of crude is x and the exchange rate y, then every month or fortnight, the government announces a maximum price of petrol, which anybody can work out from the x and the y. The rule has to be worked out to make sure that the oil-marketing companies can, in general, cover their costs. This will mean that if one company can innovate and cut costs, it will make greater profits. Hence, firms will be more prone to innovate and be efficient under this system. Once the rule is announced, there should be no interference by the government. If this is done for a while, private companies will re-enter this market. And once a sufficient number of them are in the fray, we can remove the rule-based pricing and leave it truly to the market (subject to, of course, the usual regulations of anti-trust and other competition laws).

Consider the following statements : According to the passage, private oil companies re-enter the oil producing market if 1. a transparent rule-based petrol pricing exists. 2. there is no government interference in the oil producing market. 3. subsidies are given by the government. 4. regulations of anti-trust are removed. Which of the statements given above are correct ?

(a) 1 and 2 ✓ UPSC's answer
(b) 2 and 3
(c) 3 and 4
(d) 2 and 4

Why the answer is (a)

• The passage says government control of State-owned companies is easy through 'nods and winks', so the first corrective step is a transparent petrol-pricing formula.

• Under that formula, if crude price is x and exchange rate is y, the government announces a maximum petrol price every month or fortnight, which anyone can calculate.

• The rule is designed so oil-marketing companies can generally cover their costs, and a company that innovates and cuts costs earns greater profits.

• This makes entry and competition predictable for private oil companies because pricing is rule-based rather than discretionary.

• Therefore, private oil companies re-enter the oil-producing market when a transparent rule-based petrol pricing exists (statement 1) and when government interference/control is removed (statement 2), making option (a) correct.

Why the other options are wrong

(b) 2 and 3: Option (b) is wrong because statement 3, subsidies given by the government, is not stated in the passage as a condition for private re-entry.
(c) 3 and 4: Option (c) is wrong because neither subsidies nor removal of anti-trust regulations is mentioned in the passage as a condition for private re-entry.
(d) 2 and 4: Option (d) is wrong because removal of anti-trust regulations is not mentioned in the passage as a condition for private re-entry.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2014, held on 24 August 2014. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.