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Pricing Natural Gas in Mexico: An Application of the Little-Mirrlees Rule — The Case of Quasi-Rents

Listed author(s):
  • Dagobert L. Brito


    (Department of Economics and Baker Institute, Rice University, 6100 Main Street, Houston, TX 77005, USA;)

  • Juan Rosellon


    (Centro de Investigacion y Docencia Economicas (CIDE) and German Institute for Economic Research (DIW Berlin), Carretera Mexico-Toluca no. 3655, Mexico, D.F. 01210, Mexico.)

In 1997, the Comision Reguladora de Energia 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.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 76 (2010)
Issue (Month): 4 (April)
Pages: 1131-1136

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Handle: RePEc:sej:ancoec:v:76:4:y:2010:p:1131-1136
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