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Pricing Natural Gas in Mexico: An Application of the Little‐Mirrlees Rule—The Case of Quasi‐Rents
Author(s) -
Brito Dagobert L.,
Rosellón Juan
Publication year - 2010
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2010.76.4.1131
Subject(s) - economic rent , natural gas , economics , microeconomics , perfect competition , chemistry , organic chemistry
In 1997, the Comisión Reguladora de Energía of Mexico implemented a netback rule for linking the Mexican natural gas price to the Texas price. At that time, the Texas price reflected a reasonably competitive market. There have been dramatic increases in the demand for gas, and there are various bottlenecks in the supply of gas. As a result, the price of gas in Texas now reflects the quasi‐rents created by these bottlenecks. We show that it is optimal for the Mexican government to use the netback rule based on the Texas price of gas to set the price of gas in Mexico even though the Texas market cannot be considered a competitive market, and the Texas price for gas reflects quasi‐rents created by various bottlenecks.