South-Western College Publishing - Economics  
Cold Comfort: Heating Oil Aid
Subject Elasticity of demand
Topic Elasticity
Key Words Price, money, low-income families, emergency funds, income limits, federal aid
News Story

In the face of the rising price of home heating oil, President Clinton promised to give more government help to low-income families in the Northeast. He said that he would increase the amount of money released from the Low Income Home Energy Assistance Program from $200 million to $325 million. He also promised to seek from Congress another $600 million in emergency funds for states where the winter has been most severe. Mr. Clinton also asked the states to lower the income limits so that more families would be eligible for federal aid.

Although some officials in the Northeast had been clamoring for a release of oil from the government's Strategic Petroleum Reserve to reduce prices, Mr. Clinton declined to permit its use at this time.

 

(Updated April 1, 2000)

Questions
1. a) Is the elasticity of demand of low-income households for home heating oil greater or less than that for high-income households? Explain why using what you know about the determinants of elasticity.
  b) When the price of home heating oil rises, how do low- and high-income households respond? Why? Explain in terms of their differing elasticities of demand.
2. Draw a supply and demand diagram of the market for home heating oil, marking the equilibrium price and quantity.
  a) If low-income households are given more federal aid, what happens to the equilibrium price and quantity of home heating oil? Illustrate your answer.
  b) On balance, do the low-income families gain from the increased federal aid? On what does your answer depend? Explain how elasticity plays a role in the answer to this question.
3. There was a suggestion that the government release more oil on to the market..
  a) In another diagram of the market for home heating oil, show how this would affect the equilibrium price and quantity.
  b) Who would benefit more from this - low- or high-income households? Explain in terms of elasticity.
Source Marc Lacey and David E. Sanger, "Clinton Offers Northeast Help with Heating," The New York Times, February 17, 2000.

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