Resource allocation in different economic systems — practice question

By 2023, Mexico’s energy policy was looking increasingly out of line with the approach taken in much of the world. The Mexican President rolled back recent changes to Mexico’s energy market. Those changes had raised the influence of private sector firms. He altered the balance within the mixed economy by giving priority to state-owned companies and insisted that Mexico ought to generate its own energy instead of relying on imports. The government put money into a new oil refinery and chose to keep coal-fired power stations operating. It also placed state-owned electricity and oil companies ahead of private sector competitors, making it more difficult for private firms to secure permits to produce electricity or to search for oil. Mexico has usually exported crude oil and imported natural gas. Even so, the new strategy is for the oil to be burned to produce the nation’s electricity. There has been a worldwide move towards energy self-sufficiency, but it is not clear whether Mexico can generate enough electricity for its 130 million people. The country’s balance of trade in goods could also be affected, and this had been in deficit for nine months of 2022, as shown in Figure 1.1. Figure 1.1 presents Mexico’s balance of trade in goods from January 2022 to December 2022. Energy is expected to become costlier. The operating costs of the state-owned electricity producers are much higher than those of their private sector competitors. Their old and inefficient plants are costly to maintain. These expenses will be borne by consumers, either directly or through the government spending more on subsidies to hold prices down. The environment will also be harmed. Mexico will attract less investment in renewable energy because of the shift in energy policy. Previously, domestic and foreign private sector firms did much of the investment. As a result of the policy change, Mexico is unlikely to achieve its promise of producing 35% of its electricity from renewable sources by 2024. The effects of the energy policy may spread more widely through the economy. The earlier reforms had helped draw manufacturers to Mexico by making electricity cheaper and more reliable. Now, uncertainty is putting off investors. The opportunity cost of Mexico’s new energy policy is very large. Economists estimate that Mexico could have generated almost half of its electricity from renewable sources well before its 2050 target. Multinational companies had been considering Mexico as an alternative to other countries, but because of Mexico’s shift in energy policy, those companies are likely to look elsewhere. Source: Adapted from: ‘Mexico’s energy policy’, The Economist, The World Ahead 2023, published 2022