As we
already knew before, a lot of essential goods in Malaysia were subsidized by
the government to decrease their cost of production which would make their
prices lower in the market so it will release people’s burden. Recently, the
Prime Minister of Malaysia, Dato’ Seri Najib Tun Razak unveiled the nation’s
budget for the approaching year of 2013. In this budget declaration, he
announced that the subsidy for sugar, which is a controlled item, will be
reduced by 0.20 Ringgit Malaysia per kilogramme which will bring its price from
RM 2.30 per kg to RM 2.50 per kg. This reduction of subsidy has already taken
affect, and by then, we can see the prices of sugar increased by 20 cents per
kilogramme in the market.
First
of all, we will discuss about the definition and the purpose of a subsidy. A
subsidy occurs when the government pays a certain amount to the producers to
reduce their cost of production to lower the price of the good produced in the
market. This action is similar to a financial aid to the customers. Usually a
government will choose to subsidize essential goods, such as rice, sugar and
oil in Malaysia. Moreover, a subsidy is the contrary of a tax. Because it is
the government who pays the producers and there will be a surge in supply of
the goods using the subsidized products instead of a reduction caused by a tax
imposed on some. When the government subsidize a particular good, the supply
curve of this product will shift rightward and the price equilibrium will be
lower. That is how the products will be cheaper.
Subsidies
are given by the government to lessen
people’s cost of living and to reduce the market equilibrium price byt at the
same time rises the quantity sold to the customers. The effects of a subsidy
are shown in the figure above.
Let us go back to the issue of
the subsidy reduction for sugar in Malaysia. This change will cause the
increase of sugar and any ugar based products’ prices. Malaysians conduct a
very “sweet” way of living. The problem is, is there any relative substitute
for this particular product which is considered as an essential good, so they
can avoid spendinng more to keep up with their way of living? The answer is NO.
Therefore, the deman for this good is fairly inelastic since I is basically a
necessity product for Malaysians; especially the owners of food and beverage
industries and the producers of any sugar based products. For households, the
income proportion spent on this good is not relatively high. They do not use
sugar in mass to conduct their every day life. Therefore, their demand for this
good is inelastic. However, on the other side, for food and beverage
indsutries, and producers of sugar based products; the income proportion spent
on this good is quite high because sugar is basically an essential good to keep
their businesses running. Perhaps they will try to reduce the proportion of
this particular item to avoid increasing their cost of production.
Previously, we have seen the
effects of the subsidy. With the implementation of a subsidy, the supply curve
will shift rightward and the market equilibrium price will decrease. But with
the reduction of subsidy, the supply curve will shift back leftward and the
market equilibrium price will have to increase. If there is no control on its
price, with its increase, the price of any sugar based products which are
produced in this country will have to increase as well. For example, the price
of a cup of The Tarik (which is a sweet milk tea adored by all Malaysians)
might have to increase from 1.20 Ringgit Malaysia to 1.30.
Meanwhile,
this subsidy reduction by 20 cents will help to stabilize this particular
market. If the subsidy is too high, the producers will choose to increase the
quantity supplied because it is cheaper for the to produce and finally, this
will lead to overproduction, which is a form of a market failure. A marke failure will occur if there is too
little of an item produced, which is called unerproduction, or too much of it
is produced, and that is called overproduction. A market failure, has many
sources; such as price and quantity regulations, taxes and subsidies,
externalities, public goods and common resources, monopoly and finally high
transaction costs. As we can see,
subsidy is one of theses sources. When there is overproduction, there is market
failure and a subsidy will lead lead to overproduction. The government reduce
this subsidy finally to stabilize its sugar market and give the economy more
stability.
As stated above, a subsidy can
cause a market failure. That is why the government have chosen to decrease its
expenditure meant to subsidize this good to stabilize this market decide its
value. Because a competitive market is a market in which there is no
regulation, no overly taxation, no subisidy and no dominance from any
particular firm. The Malaysian society should be able to understand that they
have to let the market forces determine the value of the goods, and
furthermore, subsidies distort the perception of the market and they reduce
competitiveness at the same time, which is not healthy for the economy. To have
a strong economy, the market as competitive as possible. If the subsidy given
by the government is too high, there will be a market failure. This reduction
of subsidy will have no harm on Malaysians at the same time because sugar
remains a controlled item in this country. The government has already a step
ahead. Even though they want to let the market decides its value, they will not
let the producers take advantage of the situation. They will supervise its
price.
In conclusion,
the sugar subsidy reduction by 20 cents per kilogramme, can be justified
economically and also by other external factors such as health. This reduction
can only bring positive effects on the Malaysian economy and its population.
Malaysians cannot only rely on subsidies, sooner or later; these will have to
be taken away by the government to help the country itself. Khairy Jamaluddin
(chief Umno youth) , they cannot stop allocating subsidies immediately because
it will be too sudden for the people, therefore they are taking baby-steps
towards a better economy. The 2013 budget announced by the Prime Minister
brings a lot of positive effects on the
economy and they have thought ahead.
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