Ｑｕｏｔｅ...

“There ain't no such thing as a free lunch.”

 

BY:

Robert A. Heinlein, The Moon is a Harsh Mistress

Get Ready For $11-a-pack Cigarettes!!!

Based on the news from CNNMoney.com (http://money.cnn.com/2010/06/22/news/economy/cigarette_tax/index.htm), the article is about the price of cigarette which had increased to $11 per pack due to the impact of tax on cigarette. Although the cigarette is getting more expensive, there is still a huge number of smokers who are buying the cigarette, therefore, we can consider that cigarette have an inelastic demand. 

Demand refers to the goods that we want it, can afford to buy it and have a definite plan to buy it. Based on the law of demand, it states that the higher the price of a good, the smaller is the quantity demanded when other factors remaining the same. 

            The price elasticity of demand (PED) is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. The graph above (Graph 1) show an inelastic demand curve, whereby the percentage change in price is larger than the percentage change in quantity demanded.

            When the government imposed tax on cigarette, this will shift the supply curve to the left as the cost of production is increases and the producers will reduce the quantity of supply. In Graph 2, a pack of cigarette only costs $6.00 before taxation. After the imposing of tax, the price of cigarette paid by buyers is increasing to $11 per pack and the price of cigarette received by the sellers is reduced to $5.15 per pack. The total amount of tax on a pack of cigarette is $5.85, where the tax of $5 per pack is paid by buyers and the rest of tax ($0.85) is paid by the sellers. In others words, we can say that most of the tax on cigarettes are paid by the smokers instead of producers.

            Besides, efficient market refers to marginal social benefit equals to marginal social cost and the total surplus (the sum of consumer surplus and producer surplus) is maximized. Graph 3 shows the inefficiency of a tax on cigarette. The quantity demanded is reduced and have the impact of rising in buyers’ price and lowering the sellers’ price. 

            The demand curve, D, show marginal social benefit, and the supply curve, S, shows marginal social cost. The shaded region in grey shows the deadweight loss, which is the loss of consumers’ surplus and producers’ surplus from the imposition of tax. The blue area indicates the consumer surplus and the red area shows the amount of producer surplus. However, the tax revenue earned by government also takes part of the total surplus, which is shown in yellow rectangle of the graph. This situation happened when marginal social benefit exceeds marginal social cost, which also called as underproduction.  

            Furthermore, cigarette is one of the examples of a negative externality as it is a source of causing pollution. Negative externalities are one of the factors of market failure and this occurs when production or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. Due to the smokers and the producers do not take the effect of pollution into account; there are negative effects that arise from pollution. 

           In graph 4, in a free market cigarette addicts will maximise their private utility and consume the amount where the marginal social cost (MSC) intersect the marginal private benefit (MPB) at $15 will 100 millions packs of cigarette. However, the social equilibrium point is at the point where MSC equals to MSB. This means that cigarette is over consumed by 40 millions pack of cigarette and occurred a welfare loss to the society, which is shown in pink shaded region as the problem of over consumed, will lead to serious air pollution in the environment. 

            As smoking can cause air pollution which is unhealthy to the society, government should release tradable pollution permits in order to overcome this problem. Those permits will allow companies to pollute until a certain level so that it will not cause serious pollution. Companies can also buy, sell and trade these permits in the market. In New York, the Department of Environmental Conservation had come out the air pollution control permit program as an action to control the pollution. Besides, government can also impose pollution taxes which mean that companies have to pay money or taxes for the pollution they produce. This may reduce the pollution condition. However, the cost of pollution is difficult to be calculated. 

On the other hand, the reasons why there are taxes on goods are because the government want to increase the tax revenue, reduces the consumption of the goods or just as expenses which will not harm both buyers and sellers. Based on the article, the main purpose of government imposing a higher cigarette tax is to generate more tax revenue in order to reduce the consumption of the cigarette by using the tax revenue to support the healthcare programs which bring benefit to the society. 

However, according to the recently news on price of cigarette in New York which is from nypost.com, it concluded that those high cigarette taxes only make the lower income and younger people even poorer. It is because the smokers are still smoking by buying the cigarettes at high prices. Although there is a decrease in number of smokers but the main reason of those smokers quit smoking is because of health-conscious, not due to the high cigarette taxes. 

             Cigarette (smoking) can cause death and affect our health condition. Without smoking, there will be less pollution, less death rates, less hospital treatment and healthier workers. However, if the industry of cigarette is removed, it will increase the number of unemployment labour, reduce the tax revenue of government and more government expenditure on longer lives and pensions. 

            A reasonable and acceptable amount of tax on cigarette may result in reducing the quantity supply and quantity demanded in cigarette. This can improve the living standard and health condition of consumers as there are less pollution and fewer smokers in the society, which is benefit to everyone. However, if the government impose an extremely high amount of tax on cigarette, it may have resulted in negative effect to the society such as rate of crime in society will increase, more sellers are selling cigarette illegally and else.  Therefore, amount of taxes imposed can affect society differently.

Minimum Wage and VAT Changes Take Effect

Based on the article (http://www.bbc.co.uk/news/business-19731923), it is about the minimum wage that imposed by UK government in order to increase the earning of lowest paid workers. The regulation that makes the wages to be illegal to charge a price which is lower than a specified level is known as price floor. 

The graph above shows that the market equilibrium before the price floor has been imposed by UK government. The equilibrium wage rate will be at W and equilibrium quantity of labour hours is equal to L.

When a price floor is applied to a labour market, it is called a minimum wage. A minimum wage is always set above the equilibrium wage in the market. Based on the graph above, assumed that the minimum wage rate is at W. Any wage rate which is below W will be considered to be illegal. 

The minimum wage reduces the quantity of labour demanded to Ld and increase the quantity of labour supplied to Ls. It is because more people are willing to work at a higher wages rate but the numbers of workers needed is decreases. With the lower quantity of labour demanded, some workers are willing to supply with wage rate of W’ per hour, which is even lower than the previous equilibrium price (W per hour) in order to get the job. 

The main purpose of government to impose a minimum wage is to help the workers in order to earn a higher wages. However, when the wage rate is increase, the number of workers demanded by the employers may reduce. This will lead to some of the workers losing their jobs. 

Besides, assume there is a case that worker A earned $500 per month and worker B earned $1000 per month before the imposing of price floor. However, after the imposing of price floor which is equal to $800 per month, worker A will benefit from it as he has an increase of wage rate but worker B will definitely worse off. Therefore, it proves that the gain from minimum wage will depend on the current salary of labour. 

Furthermore, when the quantity of labour supplied is greater than the quantity of labour demanded, there is a surplus of labour which is also known as unemployment. The amount of unemployed labour will equal to the difference between the quantity of labour supplied and the quantity of labour demanded in the market (Ls-Ld).

Based on Graph 3 above, this shows inefficiency of the labour market. As the quantity of labour employed is less than the efficient quantity, deadweight loss occurred which is shown in grey shaded region. The consumer surplus will shrink to the red triangle and the producer surplus will also reduce to blue triangle. The yellow rectangle shows there is a potential loss from job search. 

In addition, the black market may occur due to workers are desperate for looking jobs and they are willing to work on $4 per hours which is lower than price floor ($8 per hours). If most of the company will like to do so, then the policy of minimum wage is considered inefficient. Therefore, Government should minimise the number of companies which takes the opportunity to employed low-paid workers. Government can also come out with a regulation so that workers who have wages rate which is lower than price floor can complaint to the government. Thus, most of the company will worry about their companies’ image and will follow the policy. 

On the other hands, is the minimum wage fair to everyone? The labour market consists of skilled workers and unskilled workers. Therefore, if every worker in the labour market earn the same amount of wages, it is unfair to those more knowledgeable and skilled labours. When the government set a price floor to the whole country, it is also unfair to everyone as there are city and town areas in the country. The citizens who live in a city have a higher living of standard which needed a higher living costs compare to those living in a town. Moreover, the productivity of a company in different area are also varies as the technologies used are different as well. 

Another issues based on the particular article will regardless the VAT which means value added tax. VAT is a type of consumption tax that is on various stages of production. It is normally not identical and usually is paid fully by the consumers. This can also mean that none of the consumers can escape from these taxes. 

Based on the case in the article, UK government is going to increasing the amount of VAT on hot takeaway food, the provision of self-storage facilities, approved alterations to listed buildings, sports drinks, and the rental of hairdressers' chairs which will impact on the young people as most of the products are consumed by them. 

When the VAT on those goods increases, the supply of the goods will reduce as the cost of production of the products is higher than previously. The supply curve will shift to the left and results in higher prices and lower quantity demanded for those particular goods. It is because based on law of demand: when the price becomes higher, the consumers tend to buy lesser. 

Furthermore, the effect of VAT on the producers and consumers will depend on the elasticity of the curve. When then demand curve is elastic, which is shows in orange in the graph above, an increase in the tax will result in a big changes in the quantity demanded. However, if the demand curve is elastic, which is in green, an increase in the VAT will not have a big impact on the changes of quantity demanded. 

Although government impose a minimum wage to assist the low-paid workers, they increase the VAT on the same time which makes their disposal income remain unchanged. As the price floor is imposed, company will tend to employed those skilled and experiences workers instead of the inexperience youngest. Therefore, when the young people cannot get a job and their cost of living is increases due to increased in VAT, the crime rate in the society may eventually increases as well. Therefore, government should consider how to solve those problems such as unemployment and crime rate in the society. 

In conclusion, there are advantages and disadvantages of any choices that we have made in decision. Government should consider more when they imposed minimum wage as it can only benefit some of the workers but not everyone in the labour market.

Time to revise subsidy for cooking oil?

Based on the article that I selected from Star Online, http://biz.thestar.com.my/news/story.asp?file=/2012/10/2/business/12110226&sec=business, the government had distributed certain amount of subsidies towards the price of the cooking oil. The amount of subsidies is more than RM 1 billion and the subsidy for 2013 will be slightly decreases to RM 1.5 billion. The subsidy distributed by government had started since 1992 as price of crude palm oil (CPO) was trading between RM1,700 and RM2,500 per ton. The oil palm plantation players will take an action when the CPO’s price reach RM3,000 per ton above, they will imposed windfall profit tax (WPT) 15% for Peninsula and 7.5% for Sabah and Sarawak. However, some subsidies had been dropped into the wrong hands such as restaurant operators, hawkers, and small-scale food-based industries. There is an issue raise in the market that government should revise the amount of subsidy on the price of cooking oil.

            From my view towards this issue, I think government should take an action to revise the amount of subsidy on the cooking oil. This is because the subsidy is often being distributed into the wrong hands but not to the targeted household consumers group. This would be allowed the non-targeted groups to misuse the usage of subsidy. The main purpose of subsidy given by the government to producer is to help them to produce the product with a lower cost and allow the consumer to buy the product they needed at a much cheaper price in the market.

Subsidy is actually the payment made by government to the producer. The subsidy give out by the government can lead to the price of cooking oil in the market to be lower. Besides that, it also increases the production since the cost of production has been reduced with subsidy given. As the cost to produce the cooking oil decrease, the supply curve will be shift to right and the producers are willing to supply or produce more cooking oil to the consumer.

As the times go on, it will appear a situation which is the shortage because the price of the subsidized cooking oil is low now then it causes many consumers include non-targeted and targeted group want to purchase this cooking oil but the quantity of this product is not enough for every consumer especially during the festive season. Therefore, government should revise about the amount of subsidy towards the price of cooking oil. Government can reduce the amount of subsidy given out and only distributed to needy group such as poor people in the urban and rural area.

Cooking oil is a necessity good which is critical for our well-being in daily life. As we know that the closer the substitute of a good, the more elastic is the demand for it. Necessity goods usually have poor substitutes. Hence, cooking oil which is one of the necessity goods has an inelastic demand compared to the luxury good. As the shortage of subsidized cooking oil arises, the demand for the subsidized cooking oil is highly or perfectly inelastic. Consumers are not so easy to change their buying behavior and actually continue buying the subsidized cooking oil because they need the cooking oil to cook their meals every day. They maybe only will swap to buy other brands of cooking oil instead of subsidized cooking oil in the market.

In my opinion, subsidy is good and bring benefits to everyone include consumers and producers. For the producers’ side, the subsidy given sometimes can be the tool to help the firms or industries to expand their market in other countries. As the firms with the subsidy given by the government, they are more able to compete with their competitors in other countries and it actually stimulates the firms or industries’ growth. For consumers’ side, the targeted household consumer group able to buy a much lower price of cooking oil compared with the original market price.

However, when the subsidy given is too much to the producers, it will lead to market failure. Market failure will occurs when the market don’t achieve an efficient outcome or output. Market failure can be due to the problem of overproduction and underproduction. The subsidy given out by government which has decreased the price of cooking oil paid by the consumers and also increased the prices received by the producers. Thus, the producers increase their quantity produced and their marginal cost of producing the additional unit of cooking oil also increases. The marginal social benefit (MSB) equal to the market price which has been fallen as the quantity of cooking oil produced with the subsidy given. Marginal social cost (MSC) has been increased and exceeds the market price. At the same time, the marginal social cost (MSC) exceeds the marginal social benefit (MSB) so the increase in the production will cause inefficiency. At last, the market failure is occur because of the inefficient overproduction.

The explanation is shows as a diagram below that how the production of cooking oil will be inefficient when subsidy is given by the government. 

                The inefficient overproduction not only causes market failure but also the misallocation efficiency’s problem. As the cooking oil produced by the producers is overproduce, the place to allocate the products also inefficient now. Allocative efficiency is achieved when the marginal benefit (MB) equals to marginal cost (MC). However, when the products are overproducing, the marginal cost (MC) exceeds the marginal benefit (MB) so the allocative efficiency also will not be achieved and it will resulted in misallocation of cooking oil.

           Lastly, I would like to conclude overall that the article about the subsidies distributed by the government on cooking oil. As the subsidy imposed on the cooking oil, the price will be lower compared to original price and also encourage producer to produce more products to consumers because the cost of production is low now. However, government should think wisely when they impose the subsidy to the society in order to avoid the amount of subsidy goes to the wrong hands. 

Lack of farmhands pushes prices up

              Based on the article I selected from New Straits Times, http://www.nst.com.my/streets/northern/lack-of-farmhands-pushes-prices-up-1.53281, the productivity of vegetables in Cameron Highlands had decreased due to one of the factor of production which is number of foreign labor from Bangladesh. The Home Ministry had announced that they put a ban in order to reduce to employ the Bangladeshis’ labors in the plantation sector. The productivity of vegetables influenced by this news and farmers need to push up the price of vegetables in the market now.

When the farmers are lack of farmhands, they have not enough farmhands to supply the vegetables at Cameron Highlands so the supply curve will be shifted to left. Thus, the productivity of vegetables dropped drastically and the prices of vegetables have been push up. The diagram below shows the shifting of supply curve from S1 to S2 when the lack of farmhands happens.

            In my view towards this issue, the farmers at Cameron Highlands can hire the workers from other countries such as the workers from Indonesia instead of waiting of the ban put by the Home Ministry to be removed. This is because they cannot predict that when the ban will be removed so it is better for the farmers to search for the workers from other countries as well. The workers from other countries also had the skills and patience on producing the vegetable in the plantation sector after they are trained by the farmers. At the same time, the farmers have enough workers to supply the vegetables in order to meet the demand of consumers.

            However, if the farmers push up the price of vegetables in the market, the firms will worse off. This is because the consumers will seek for the substitute of vegetables to meet their consumption satisfaction when the price of vegetables is high but not to continue consumes the vegetables from Cameron Highlands. Therefore, the firms push up the price of vegetables is directly influence their market at Cameron Highlands.   

            I will suggest that the farmers that make some adjustment in term of the resources such as number of workers and buying additional tools to help in produce the vegetables at Cameron Highlands during the short-run supply. They can take in more local and foreign workers to work in the production as well. Therefore, in the short-run supply, farmers can still slightly make some resources adjustment so they able to meet the demand of vegetables from the consumers but not to push up the prices. In the long run, farmers can make more resources adjustment such as obtain more resources from other firms. Besides that, the workers are now well trained by the farmers in the plantation sector after several years. Then, they have more resources include tools and workers to produce the vegetables now.

On my side, I think that there are still have other reasons that push the price of vegetables to go up in the market. Besides the lack of farmhands, a bad weather also can cause the price to be increased and shift the supply curve to the left. As an example, if there had occurred drought during the production, it may affect the speed of the production to be slow and the supply curve will shift to left. On the other hand, the demand curve do not shift to left or right because the consumers will have the same desire to consume the vegetables no matter the weather has changes. In my opinion, the bad weather had caused the farmers less produce the production of vegetables at the original old price.

For an example, the original equilibrium price for the vegetables is RM5 and the equilibrium quantity is 50 packs. When the drought occurs, it affects the speed of production so the producers tend to produce fewer vegetables, then the supply curve will shift from S1 to S2. After the supply curve shifted to the left, the new equilibrium price will be RM8 and the new equilibrium quantity is 30 packs now. Thus, a bad weather can be one of the reasons why the prices had been push up except the reason of farmhands. The example is show as the diagram below. 

Another factor that influences the price of vegetables to be increased is the expected future value for the vegetables in the market. If the expected future value of vegetables is high in the future, the supply of the vegetables for today will be decreased because the producers will decide to produce more in the future but not produce more now. Hence, the supply curve is shifted to left when the producers decide to produce fewer vegetables.

For an example, the original equilibrium price is RM6 per pack for the vegetables and the equilibrium quantity is 40 packs. As the expected future value for the vegetables will be higher in the future compared with now, the producers decide to produce fewer vegetables so the supply curve is shift from S1 to S2. The new equilibrium price for vegetables is RM10 per pack and the new equilibrium quantity is 20 packs. The diagram below shows that expected future value for the vegetables is one of determinants that cause the price to be push up. 

When the price of vegetables at Cameron Highlands had increased, we can see that the quantity of vegetables had decreased so it actually brings some effect on the producer and also the consumer. On the producer’s side, they will earn less revenue or income because when the price of vegetables push up, the consumer will not consume as much as before. On the consumer’s side, as the price of vegetables increases, they may seek the substitute of vegetables such as fruit in order to meet their consumption satisfaction in their daily life.

            Lastly, the main issue in this article is about the price of vegetables at Cameron Highlands had been push up due to the problem of lack of foreign workers from Bangladesh. I will like to suggest that the farmers can seek for other solutions to solve this situation. There are also still have other reasons that has cause the price of vegetables to be push up which are the bad weather and the expected future value for vegetables. A few effects had been affect the producer and consumer when the price of vegetables had been push up.