Economics Higher Level Internal Assessment

Session: May 2022

Word Count: 792

 Politics
English Edition | 09 August, 2021, 08:59 AM IST | E-Paper

Maharashtra government considers Rs

187-crore transport subsidy to sugar
mills

Agencies

We have proposed a scheme of giving transport subsidy of Rs 1/kilogram of sugar sold using the railways at a market which is
located more than 800 kilometers away.

To regain the domestic markets of east and north east India lost to sugar mills from Uttar Pradesh,
Maharashtra government will deliberate a proposal of giving transport subsidy of Rs 187 crore
to the sugar mills. The scheme will be applicable to sale of sugar made to markets served by the
railways and which are located beyond 800 kilometers from the sugar mills.

Shekhar Gaikwad, commissioner (sugar), Maharashtra said, "The sugar mills from Maharashtra
have lost their traditional markets of the north eastern, eastern and northern states to mills from
Uttar Pradesh making them unable to sell sugar as per the quota allocated to them. We have
proposed a scheme of giving transport subsidy of Rs 1/kilogram of sugar sold using the railways at
a market which is

located more than 800 kilometers away." The total outlay of the proposed scheme is of Rs 187
crore.

 The article provided above is about the government of Maharashtra proving subsidy to sugar mills

in the state of Maharashtra to regain domestic markets lost to other states while also strengthening

them. As per information provided by the article, this subsidy is worth INR 187 crore will be

provided through a scheme in which producers get INR 1/kg for transport purposes under a set of

conditions.

The key concept through which we will be analysing this article through are: Government

Intervention & Economic Wellbeing. Government Intervention exists when an overseeing body, the

government in this case, would deliberately intervene in the market where it sees a need to change,

actively affecting the decisions that an organisation takes. Economic wellbeing is for the betterment

and sustainability of the economy while also relating to the level of prosperity and quality of living

standards that are to be enjoyed by members of an economy. We could evaluate economic

wellbeing by looking at present and future financial security, ability to meet basic needs, etc.

In Fig 1.1, we can observe the

implementation and inclusion of a

subsidy on sugar. Due to this subsidy the

supply curve shifts to the right and thus

we can observe a decrease in the price of

sugar but an increase in the demand for

sugar (Blink and Dorton 116). Reasons

for this will be discussed later in this

document.

 In Fig 1.2, we can see there is a

negative externality of

consumption for sugar, as indicated

by the welfare loss and also due to

MSB (Marginal Social Benefit)

being lower than MPB (Marginal

Private Benefit) (Blink and Dorton

135). Why is sugar has a negative

externality is discussed later in this

document.

The price of sugar decreased due to subsidy provided by state government which would lead to

increased demand as per the law of demand. The said subsidy was provided to regain the domestic

markets of East and North East India lost to sugar mills from Uttar Pradesh, and to further

strengthen these domestic markets.

The subsidy provided has a budget of INR 187 crore which sugar mills will receive in the form of a

scheme in which it would cover the cost of transportation by INR 1/ kg. However, due to the nature

of sugar being a demerit good, there would be a Negative Externality of Consumption that would

have adverse effects.

The major stakeholders that would be affected by this would be the suppliers and the consumers.

Now that suppliers are having a major cost of their product covered, they could enjoy higher profits.

Consumers would purchase more sugar as it is at a lower price. In the short run, both consumers and

suppliers would benefit as suppliers would be producing more as the cost of production is reduced

as sugar mills are price takers and the incentive is to make higher profits. Consumers in the short

run would consume more sugar as discussed earlier. However this would change in the long run.

Sugar mills are price takers, and as more suppliers enter the market seeing an incentive of more

profit, supply would increase and consumers would not consume at the previous price equilibrium,

so price reduces and profits go from abnormal to normal or if we speculate, to negative economic

profits. And at this point, the subsidy provided wouldn’t make a difference. For consumers, yes

they would continue to benefit as sugar is still cheap, but as they consume more it would create a

negative externality as sugar is a demerit good and when consumed at higher quantities would lead

to health concerns such as obesity and diabetes. This in-turn would lead to external costs that would

be paid for by both consumers and the government as increased obesity and diabetes would need

treatment and in the interest of public health, government would allocate more resources to health

sector to help these individuals. The question now arises, “where would the government find these

resources?” In theory they would increase taxes on these sugar mills and their normal profits would

turn into negative economic profits further affecting sugar mills. So as we look at the affect of long

term and short term we can tell that there are pros and cons to this subsidy in the larger perspective

only benefiting in the short run.

In conclusion, it is important that governments ensure economic wellbeing of their domestic

industries while also balancing them between merit and demerit goods. Subsidies are important but

they can only do so much and policies are a much better alternative to ensure sustainability.

Needless to say, these evaluation are mere assumptions and in economics if we were to lock ten

economists in a room with a problem, there would be twenty different solutions.

Bibliography

Bhosale, Jayashree. “Maharashtra Government Considers Rs 187-Crore Transport Subsidy to Sugar

Mills.” The Economic Times, 9 Apr. 2021, economictimes.indiatimes.com/news/politics-
and-nation/maha-govt-considers-187-cr-transport-subsidy-to-sugar-mills/articleshow/
81994362.cms.

Blink, Jocelyn, and Ian Dorton. Oxford IB Diploma Programme: IB Economics Course Book. 2020

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