ECONOMICS COMMENTARY

Name: Martin Naunov Title of the article: Sugar industry assures adequacy of stocks Source of the article: Bangkok Post Date the article is published: March 3, 2011 Date the commentary was written: October 27, 2011 Section: 1. Microeconomics Word Count: 723

To begin with, the newspaper article comments on the domestic allocation of sugar in Thailand. More specifically, Thailand is currently facing a surplus, a state or situation where the amount supplied exceeds the amount demanded for a product or service. Demand is a curve showing the various amounts of a product consumers want and can purchase at different prices during a specific period of time. Supply is a curve showing the different amounts of product suppliers are willing to provide at different prices.

As we can see from the graph, supply is conspicuously exceeding the demand. We can clearly see that the price of sugar is found below the equilibrium price. The equilibrium price is found where demand equals supply. In this situation, the price of sugar is below the equilibrium price because the government has implemented a price ceiling. Price ceiling, or Cap of Price - as being mentioned in the article, is defined as the maximum price a seller is allowed to charge for a product or service. Price

ceilings are regulations designed to protect consumers (especially low income portion of consumers) from not being able to afford necessities.

However, the price ceiling effectiveness in this situation should be questioned for several reasons.

In the paragraph 7 of the article the Industry Minister of Thailand, Chaiwuti Bannawat is quoted. He states Thais consume no more than 2.3 million tons of sugar per year so if we increase it to 2.8 million, it is as if we are encouraging our neighbors to buy cheap sugar. In addition to this, the prices in Cambodia, Vietnam and China are 35-50 baht, shown by the price equilibrium of the above graph, against 23.50 in Thailand. In this case, it is clear that price ceiling promotes the problem of black market in the form of smuggling. Smuggling is defined as moving goods illegally into or out of a country. Sugar will be smuggled to neighboring countries, which may cause an increase in the price of sugar and later lead to a severe shortage of sugar.

Furthermore, there already is a growing concern that a sugar shortage is looming, even though Thailand is facing a relatively big surplus. These are false rumors but in fact may cause a change in the consumers expectations leading to sugar shortage. The psychology of the market has been documented in the article; people start to believe that a sugar shortage will occur and in turn they start moving in a direction where they buy and stock more sugar. Over time, the quantity demanded exceeds the quantity supplied leading to a sugar shortage.

Therefore, the sugar shortage may either be affected by either smuggling or psychological reasons. In order to prevent a sugar shortage, as well as to minimalize the surplus the government must take some actions. As suggested in the article, the government should either step up controls against smuggling or reconsider the price of sugar.

Thai agriculture is highly diversified and competitive. Thailand is a major exporter in the world rice market. Grain, fishery products and many other agricultural commodities are also produced in significant amounts. Therefore, stepping up controls against smuggling is a long-term investment and even though it will cost the government a lot of money, in a long run, the government will benefit from it in form of taxes. On the other hand, some suppliers will not be able to charge for that price so they will drop out of the market. This causes a decrease in the supply.

Products that are necessities, such as sugar in this case, are more insensitive and inelastic to price changes - since there are no close substitutes available, consumers would continue buying these products despite price increases. Price elasticity of demand is defined as the measure of responsiveness in the quantity demanded for a commodity as a result of change in price of the same commodity. Following, the government may reconsider the prices and try to adjust the price cap in order to decrease the price gap between Thailand and its neighboring countries without having a significant decrease in the quantity demanded.

These two actions complement each other. For that reason, in order to fully solve this problem, the Thai government should implement both of the actions.