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1.1 MIXED ECONOMY IN DEMOCRATIC COUNTRIES
An economic system is a way of organizing the relationship among individuals, firms and government agencies on how to make choices when confronted with basic economic questions. One of them is mixed economy. This is an economic system which combines both capitalism and socialism to solve basic economics problem. A mixed economy in an economy both the public and private sectors play a role in the economy.
In real world, most of the countries practice mixed economy such as Asia (Malaysia, Singapore, Thailand, Indonesia, India, Pakistanand South Korea), Western Europe (Sweden, Norway, Spain, Germany and France) and South Africa. Since there are limited resources, a nation or society has to decide how to allocate its limited resources efficiently to produce goods and services to satisfy the need of the people. To do this, three fundamental economic questions need to be answered. Thus, an economic decision is made based on the characteristics of mixed economy system.
How the mixed economy system solve basic economic problems :
a) What to produce In mixed economies, the question of what to produce is decided by both the public and private sectors. The goods produced and services provided depend on the consideration of social welfare and economic growth.
b) How to produce
The public and private sectors will decide on the techniques of production to be used in the production of different goods and services; choose the best method labour or machine.
c) For whom to produce The distribution of goods and services is also decided by the public and private sector. The mechanism does not fully function in mixed economies. In many mixed economies, the government intervenes directly through price controls and indirectly through imposition of indirect taxes and subsidies.
Characteristics of a mixed economy :
a) Public and Private ownership of resources The private and public sectors play important roles in a mixed economy. Private enterprise conduct business freely and the government encourages the private sector by providing the infrastructures and facilities.
b) Price mechanism and economic plans in making decisions The price mechanism is used to price both goods and services. However, commodities such as sugar, oil and rice are declared as controlled items in Malaysia and the government fixes their prices. Most of mixed economies accept economic planning as an instrument of economic growth and social justice.
c) Government helps to control income disparity In most mixed economies, the government controls income disparity through income taxes and welfare payments. The government also has direct control over profits, wages and rents. Thus, the government helps to narrow the income gap between the poor and rich people.
There are numerous advantages of a mixed economy. Monopolists are single players in an industry. The government also uses direct provision. In a mixed economy. i. However. defence and health to increase the standard of living. there is significant co-operation between the public and private sectors leading to economic development.d) Government intervention in the economy The government will not intervene in the economy except for particular industries. For example. f) Government control of monopolies.4 Advantages of Mixed Economy The economic structure of a nation is a very important factor in the progress of the country. They have complete. low cost housing project in Malaysia are administered by the government and cater to the lower income group. In mixed economies. for example. Provides fair competition 4 . the government will regulate the power of monopolists 1. While in some countries. public and business sectors. e) Co-operation between the government. both the government and the private sector jointly control the economic structure. education. in mixed economy. The government will carry out certain project or produce certain goods that the private sector consider unprofitable. This project is not profitable venture for private enterprise. the government uses legislation for unsafe goods categorized as illegal products such as military items. In order to avoid customers being exploited by monopolists. the private organizations or the market force is the deciding factor in the economy of some countries. the economic structure is completely controlled by the government. sole control over the price of goods or services.
Optimum utilization of national resources In a mixed economy. mixed economy A 5 . For instance. v. a mixed economy does not allow any monopoly as both government and private enterprises enter every sector for business.5 Disadvantages of Mixed Economy The disadvantages of a mixed economy really depend on how "mixed" it is. iv. iii. the control may stifle growth. if it is mixed more towards a free-market.The presence of private enterprise ensures that there is fair competition in the market. Market prices are well regulated The government with its regulatory bodies ensure that the market price do not go beyond its actual price. but if it is mixed more towards a command economy. the resources are utilized efficiently as both government and private enterprises are utilizing them. People are given more power The general people have more say when it comes to the quality and the prices of products and services. though). 1. For instance. ii. and the quality of products and services are not compromised. Mixed economies can also have different characteristics. It does not allow monopoly at all Barring a few sectors. there is little regulation (some may see this as a good.
Mixed economy system has a natural tendency to move further and further away from reliance on competitive market mechanism to greater and greater bureaucratic controls and interventions until the system efficiency goes down to zero and the system breaks down or dictatorships get fairly established to hide inefficiencies and remove all economic and political freedom from the citizens. Mixed economic systems incentivises corruption and political-bureacracy-capitalist nexus enjoying at the cost of the citizens. There are numerous disadvantages of mixed economy system are the following: i. Mixed economy systems tend to encourage more state monopolies. but due to its regulation. The key is to find a balance amongst the many facets of economies (mixed economies are not limited to the two dimensions mentioned in this answer . There are many many more ways to fashion a market structure) the both encourages growth and supports the beliefs of the populace that are governed by it. A will stifle profits due to it's high tax structure. ii. the more its mixed nature embraces more and more of government / state intervention and State planning and reduces the reliance on competitive market economy management mechanisms. well-niched businesses). 6 . the building of new plants or refineries might be lowered. This could result in a small number of very large and profitable businesses.regulation and taxes. It's efficiency property reduces in progressively higher degree. iv. if environmental regulations are strict. For instance. v. Each of these will share a different set of disadvantages. making the Govt. Mixed economic systems often turn into closed economies hindering international trade and globalization and depriving citizens from he benefits of an interdependent world economies. the overwhelmingly large economic player as compared to corporate or individual entities. iii. but will encourage new ideas due to its low regulation (this could result in many weird effects such as an economy comprised almost solely of small.maybe high tax low regulation while mixed economy B might be low tax and high regulation. some new ideas (and some growth) will be stifled. higher and higher tax to GDP ratio and dominant public finances. B will encourage profits.
7 .vi. Mixed economic systems delivers neither efficiency goals achievable through competitive market system nor do they bring about fast reduction in poverty incidence and socialistic societies People can't make their own decisions.
there is government intervention. Basically there are two types of price control : price ceiling and price floor. the sellers can sell the product below RM1. . There are fixing higher limit or lower limit on prices in certain markets and imposition of taxes and subsidies for certain items. Rent control is a price ceiling applied to the monthly price for rental housing or 8 . the price ceiling will be imposed. Government control and fixes prices for certain goods and services. which means the prices are determined through the forces of demand and supply. When the government feels that high price of essential goods such as rice is likely to affect the lower income group. Price mechanism is ppracticd in mixed economy. So. government also imposes rent control for houses or apartments. there is no goverment intervention but in mixed economy system. But now. For example. Sometimes the government interventions in the market by fixing the prices can cause shortage or surpluses due to differences in quantity suppplied and quantity demanded. steel bar and others. we will focus what is meant by government intervention in the market and how to their plays its role in the market equilibrium. 2. supply curve or both curves to shift.2. rice. example sugar.1 Price Ceiling or Maximum Price Price ceiling is legally established price that is not allowed to increase above a maximum level set by the government. cooking oil. the price of sugar is fixed at RM1. we have to deal with the external intervention in the free market that can change the equilibrium priceand quantity. There are several types of government intervention in the market. Governments determines the price and not the price mechanism.0 GOVERNMENT INTERVENTION IN THE MARKET In Capitalism. These type of government interventions will cause the demand curve. Price ceiling is also called maximum price.45 per kg but not more than that.45 per kg. cement. Besides the essential goods.
and for construction materials. which is below the equilibrium level.1 : Fixing the price below the equilibrium level creates an excess in demand or shortage. In Malaysia. diesel and LPG as well as cooking gas. Government also imposes price ceiling for petrol. 9 . China and others practice rent control. These prices are set below the equilibrium price and sellers are not allowed to increase the prices for these items. Price S Price ceiling / maximum price Shortage D Quantity Figure 2. white bread and condensed milk. As shown in Figure 2. This is because rental for housing or apartments normally takes large portion of everyone’s budget especially for the lower income group. wheat flour. Government also imposes ceiling price on food items such as the price of cooking oil. the price of low-cost houses is kept at RM42000 that is below the market price. A shortage results because the quantity demanded is more than quantity supplied. fixing the price below the equilibrium level creates an excess in demand or shortage. Many countries in their major cities such as United States.1 below. government control the price of low-cost houses.apartments. This regulation is to help the lower income group to get rental houses at affordable price.
As a result. The price ceiling for the low cost houses is fixed below the equilibrium price at RM42 000 per unit. Figure 2. Price of low cost house (RM) 100 000 SS 60 000 40 000 20 000 DD 200 Quantity (10³ unit) 400 Figure 2. The excess demand over supply creates shortages of 200 000 units. Price floor is also known as minimum price.2 shows the efficient outcome in the price of low-cost houses in Malaysia. The governement practices price floor commonly in the agriculture sectors.2 Price Floor or Minimum Price The effect of a price floor is opposite to pric ceiling. 2.For example. the quantity supplied drops to 200 000 unit. This price is not allowed to decrease below a minimum level set by the government but sellers are allowed to sell at a price higher than the minimum level.2 : The efficient outcome in the price of low-cost houses in Malaysia. A price floor is legally established price set by the government at a level above the equilibrium price in a free market. the quantity supplied drops to 200 000 units and quantity demanded rise to 400 000 units. The price control is to protect the farmer’s income if the prices of commodities are too low 10 . The equilibrium price and quantity for low cost houses are RM60 000 and RM300 000 units respectively. As a result.
This is because the minimum wage rate is higher than the equilibrium wage rate in free market. government controls the price of wheat to help poor farmer to increase their income with higher price. Therefore as wage increases the quantity supply of unskilled labour will increase.under the free market. This is because firms can substitute the low skilled labours with machines of foreign workers with lower wage rate. higher wage rate will encourage more labours to be hired and low wage rate will discourage them to work. However. On the supply side. As a result there will be an excess supply of unskilled labours in the market. Besides the agricultural products. So the firms will hire less unskilled labours if the wage rate is high. The number of labours willing to offer their service will increase and there will be upward movement in supply curve that will increase the quantity supplied to L2. 11 . Let us say the market is set to be free and have freedom to bargain. A price floor on wage rate is called minimum wage rate. a shortage exists where number of labours supplied is more than number of labours demanded in the market as shown in Figure 2. the firms will hire less labours at L1. As a result at Wm.3. The prices will be adjust so that the equilibrium wage rate is achieved at We equilibrium quantity of labour will reach at Le. For example. In Malaysia. government recently introduced the minimum wage rate for the rubber tappers or estate workers.3. This can be shown in Figure 2. Suppose the government interferes in the market by setting the minimum wage rate at Wm. The minimum wage rate will reduce the number of unskilled labours demanded in market. So. at wage rate of Wm. Minimum wage rate is the lowest wage paid to the worker to protect them from employer’s exploitation. the price floor is also imposed on wag rate in most countries. which could create surplus. excess supply would cause unemployment for low skilled labours.
Wage rate Surplus Wm We Eo SS DD L1 of labour Le L2 Quantity The figure illustrates the minimum wages rate imposed in labor market. there is excess supply over demand that creates surplus of labours. rate is imposed above the equilibrium wage at Wm . At Wm. At the equilibrium. the wage rate is We and total labors are L ₀ When the minimum wage . Figure 2. 12 .3 : Excess supply of unskilled labours in the market . the supply of labor increases to L₂ and demand for labor by firms drops to L1 as a result of high wage rate.
An MWS could release a few thousand of these locals into various industries and reduce the need for foreigners. Whereas large firms and multinationals offer attractive pay schemes in line with international standards. the retrenched. The Government also needs to consider creating a viable social security system or a welfare state to help low-paid workers. Considering the high cost of living and other related factors.transports service. 13 . The Government needs to consider the various factors and changes that make an MWS feasible and necessary for the continued industrial and economic growth of the country. most of the industries have automated or mechanised their manufacturing and production processes. This subsistence level of wages has placed large number of workers in urban poverty. Only the agriculture sector is labour intensive.1 CASE STUDY A Minimum Wage Scheme Will Benefit Many The call by the Malaysian Trades Union Congress (MTUC) for a minimum wages scheme (MWS) should be looked into seriously by the Government. unable to educate their children sufficiently for better prospects. such as shops.etc. the widowed. this is not the case with SMEs. The lack of an MWS has also led to the large-scale employment of foreigners in areas where locals could be used. Many locals have also turned to self-employment instead of working for low wages. which make up about 90% of local industries. due to vast technological innovations and changes. Since the 90s. and here the sky-high prices of commodities makes an MWS feasible. the minimum wage for workers should be RM1.2.2. etc. as workers in the lower categories are much affected by the increased cost of living and inflation. retirees. The MTUC too should not opt for a confrontationist stance with the Government. single parents. The Government’s agreement to an MWS will be the best affirmative action for all. unlike before. as any MWS can only become a success with the support and cooperation of the Government. the unemployed. Wages now form a smaller portion of production costs. leading to employers needing only minimum workers.SMEs. Malaysia has a per capita income of RM40.000 per annum but lower-end workers can hardly expect a quarter of this amount. compared with the present RM600-RM700 per month.000 per month.
Disadvantages • Producers tend to receive illegal payments from consumers. Market condition Advantages Shortage • Consumer could purchase goods and services at lower prices. • Consumers pay more than the equilibrium price. Table 2. • Produce produces lower quantity. 2. • Minimum wage rate leads to unemployment. Price ceiling of Maximum price Price Price is set below the equilibrium price and is not allowed to rise. • Floor price protects producers income especially the farmers.3 Difference between price ceiling and price floor.2. Price Floor or Minimum Price Price is set above the equilibrium price and is not allowed to drop.4 Impact of tax 14 . • Surplus of production lead to waste of resources for government. • Emergence of balck market.1 : Difference between price ceiling and price floor. Surplus • Higher wage rate help the unskilled labour to get higher and stable income.
higher taxes are imposed on cigarrete to discourage its usage. the upper portion (A) above the initial equilibrium is the consumer’s portion and lower part (B) is the producer’s portion of tax. DD and SS0 the initial supply curve. So. These taxes are revenue for the government. The buyer had to buy at a higher price of RM8. The supply curve shift to left as tax would increse the cost of production and thus reduce the supply of cigarettes.In this section. Whereas. Both the taxes and subsidies have an effect on the equilibrium price and quantity in the market.50 = RM2.1 Taxes and equilibrium in market Indirect tax is a tax imposed by government on producers or sellers but paid by or passed to the end-users (consumers). but movement along the demand curve takes place.50 after the tax. The difference between the buyers price and sellers price is the amount of tax. For certain products. we will analyze the impact of specific tax of RM2. Indirect taxes consists of import duties. SS1 intersects with demand curve. 2. Thereis no change in demand.50 – RM6.50 per pack and quantity of 200 packs. the equilibrium price and the equilibrium quantity is RM7.4. Figure 2. RM8. government imposes taxes in the form of indirect tax. 15 . there are two types of taxes : Ad valorem tax and specific tax. sales tax.50 after the tax is imposed. We will discuss on the effct of tax on cigarettes. Figure 2. In some other products.00 is shared equally between buyer and seller.4.00 per pack. The government revenue is the portion of A and B as shown in Figure 2. service tax and export duties. we are going to look at another type of government intervention: taxes and subsidies. The new equilibrium occurs when new supply curve. Some of the taxes are imposed on the seller that led to increase in the price and discourage the consumers to use the product. Ad valorem tax is based on the percentage of tax.50 per pack of cigarettes isimposed on cigarettes. excise duites. DD at prive of RM8. Before tax. specific tax is based on the quantity sold.4 shows the equilibrium in a market with demand curve. the government provides subsidies.00 per back of cigarettes. For example.4 illustrates how the tax amount of RM2. To simplify. Basically. Whereas the price the seller received is RM6.
which is shared equally by buyer and seller. The price the buyer pays is RM8. Supply curve shift to left from SS 0 to SS 1 and equilibrium price rises to RM 8.50 per pack while quantity falls to 200 packs.4 : The government revenue is the portion of A and B 16 .00 per pack has decreased the supply since it would increase cost of production. Figure 2. The imposition of excise tax of RM2. respectively.00.50.50 Consumer’s portion 6.50 per pack and 300 packs of cigarettes. The difference in the price is the burden of tax RM2.50 E₁ E₀ 7.Price of cigarette (RM) SS₁ SS₀ 8.50 and the price the seller receives is RM6.50 Producer’s portion DD Quantity (Packs) 200 300 The initial equilibrium price and quantity is RM7.
The house expects the earnings of the two companies to be hit by 8-12% between financial years 2007 and 2009. There are still two months to go before the Government tbales the yearly budget.2 CASE STUDY Duty Hike Puts Tobacco Boys in a Bind For the local cigarette manufacturers. A lot of cheap cigarettes are produced illegally by small manufacturers. ‘Our new assumptions 17 . are that it could lead to a rise in smuggling activity and proliferation of low priced cigaretts.who have been steadily making their presence flet in the value-for-money segment in recent years. The consequences of the latest move.4. Aseambankers expect industry volume sales for 2007 to drop by 8-10% now.70 (for value brands). It was only in April this year that the Health Ministry threatened to impose a minimum price on tobacco products if the companies did not end their price discounting activities. which were seen as thwarting the Ministry’s public health campaign aimd at getting smokers to kick the habit and curbing underage access to the products. the Finance Ministry announced that the excise duty for cigarettes would be increased by 25% with immediate effect. On July 2. It has also downgraded its recommendations for British American Tobacco (M) Bhd(BAT) and JT International Bhd (JTI) to fully valued. thanks to the rising trend among smokers of down-trading or switching from premium to value brands. compared with its earlier expectation of a 2-3% decline before the recent duty hike. Industry watchers worry that industry volume could be severely hit now that the price of a 20-stick pack of cigarettes has increased by 11 to 14% . The value segment of the local cigarette market has been recording encouraging growth in the last few years. it must feel like September already. a significant level of down-trading to low-priced or contraband cigarettes is expected to occur. They contend that although the price increase can sufficiently cover the excise duty hike.RM8.2.’it says.2 (for most premium brands) and RM6. Aseambankers revised its neutral rating for the sector to underweight following the July 2 announcment. but the unprecedented excise duty hike for cigarettes announced last week already has the tobacco boys in a bind. ‘Demand may be inelastic but we suspect pricesnsitive consumers will be more than willing to down-trade now thatthe sub-value (lowpriced) brands are easily available. however.
6%. As things stand.00 from RM 42.3%. the house has adjusted its financial year 2008 volume assumptions for BAT from a contraction of 3% to a 5% decline.would be similar to the actual volume decline in 2005 and 2006. after imputing a 6% volume contraction. Deutsche Bank offers a contrarian view.00 per 20-stick pack to narrow the price gap between the quasi-legal and the legal cigarette market.25 previously. and revised its target price for the stock to RM40. Citigroup reckons that the civil servants’ 35% salary hike.50 per share. This translates into a net yield of 5. which is higher than the market average of 3. Deutsche Bank sees no compelling reason for investors to offload BAT shares despite the fact that the house has adjusted BAT’s earnings downwards. and the government’s continued pump-priming efforts have helped boost disposable incomes and consumer sentiment. This would cause volume growth to remain at 1% next year. Recall that prices were previously raised as high as 15-30% but the volume decline was just over 10%. its analyst Khair Mirza expalins. the house argues that most smokers are likely to absorb the highr prices. As a result. At this juncture.8%. The foreign research outfit believes that BAT will maintain its dividend of RM2. Despite the generally bleak prognosis for the sector and its listed players. Every onepercentage point decline in volumes would cause itsearnings for BAT to contract by 1. Likewise. which takes effect this month. 18 . JP Morgan points out that the expected slide in industry volume could be mitigated if the government beefs up its enforcement on the contraband market and implements a minimum price of RM5.
including minerals and carbon credits. Malaysia hopes to serve as an oil and gas hub for the Asia Pacific region. a subsidiary of PETRONAS Bhd. with a mandate to oversee and implement policies and programmes to transform the oil and gas services industry in Malaysia. Dialog Group Bhd. similar to how the Amsterdam-Rotterdam-Antwerp hub serves the European market. excellent banking and financial services.4. To date. investor-friendly government and agencies. Malaysia offers petroleum-storage and petroleum-trading companies a competitive advantage in terms of vast land areas. YTL Power International Ltd. MPRC is an agency under the Prime Minister's Department. a highly skilled multi-cultural and multi-lingual professional and technical workforce and a pro-business. petroleum-related products. a cost efficient place for doing business.2. trading licences have been awarded to Petco. a subsidiary of Vitol Group of Switzerland. access to world class infrastructural facilities. Malaysia Petroleum Resources Corporation (MPRC) is the architect and developer behind the GIFT programme. The objective of this transformation is to create regional and global champions from Malaysia's oil and gas services companies and to encourage global oil and gas multinational companies to use Malaysia as their regional or operational headquarters for the Asia Pacific region. The Global Incentives for Trading (GIFT) programme is a set of incentives designed to encourage global petroleum trading companies to use Malaysia as their regional base to enter the markets of China.4. 2. BB Energy of the United Kingdom and Vitol Trading Malaysia Labuan Ltd.. With these facilities and incentives in place. selected commodities. India and Southeast Asia.3 CASE STUDY Petroleum Income Tax Act Will Be Utilised To Incentive New Players To Enter The Marginal Field Development Segment. Companies that participate in the GIFT programme will register their companies under the Labuan International Commodity Trading Company (LITC).. LITC-status companies can trade in petroleum. a subsidiary of YTL Group Bhd.4 Effect of elasticity on tax burden 19 . The GIFT Programme is managed and supervised by the Labuan Financial Services Authority (Labuan FSA).
In Figure 2.5(a) illustrates how the portion of tax shared between the buyer and seller when the demand is inelastic compared to supply.5(a). After the tax had been imposed.5(b) the seller would share higher portion of tax burden since the demand is more elastic than supply.50 per pack.00 per pack.00 per pack.4.50 of the total tax of RM2. The buyer had to bear the burden of RM1. the price the buyer pays is only RM8. the demand is more elastic than supply.00 per pack and the price the seller receives is RM7. In Figure 2. 20 .5(b) . Figure 2.00 per pack and the price the seller receives is RM6.00 per pack. In this case the seller’s share of tax is RM1. we had seen that the buyer and seller shared equally the amount of tax.50 and the buyer’s share is only RM0.50 while the seller only shares RM0. The burden of tax will differ depending on the elasticity of demand and supply. The initial equilibrium price and quantity are the same as in Figure 2. In the earlier example. As shown in Figure 2. The price the buyer pays is RM9. the buyer shared more of the burden of tax since it its demand is inelastic.The portion of tax shared between buyer and seller depends and the elasticity of demand and supply.
respectively.50 BUYER Eo SELLER 6. the seller bears more tax than as demand is more elastic than supply. In (a).50.50 and RM0. 21 . In (b). the demand is very inelastic than supply. the burden of tax is more to the buyer compared to sellers.5(b) : Demand is More Elastic than Supply The initial equilibrium price and quantity is RM7.00 BUYER 7.00 SELLER SS₁ 300 Figure 2. The sellers and buyers share total tax of RM1. respectively.5(a) : Demand is Inelastic to Supply SS₂ Price (RM) SS₁ 8.50 per pack.00 7.00 DD Quantity (kg) 300 Figure 2. The buyers’ share of tax is RM1.50 per pack and 300 packs of cigarettes.SS₂ 9.50 and sellers’ share is only RM0.50 7.
Subsidy will lower the cost of production. 22 . diesel and others. the supply will increase because of a subsidy encourages producer to produce more. Malaysian government provides subsidies for fertilizers.5 Impact of subsidy The impact of a subsidy on equilibrium price and quantity is the opposite of tax effect. The government provides a subsidy. Subsidy is an incentive from government to encourage producers or sellers tp produce more. A subsidy is an incentive from the government to encourage producers or sellers to produce more.6 : Effects of subsidy The effect of subsidies on the equilibrium price and output are the opposite of tax effects. Subsidy would lower the cost of production. petrol.2. petrol. diesel and others. Supply increases and the supply curve shifts to the right from S0 to S1. Table above summarizes effects of subsidy. Price S0 S1 DD Quantity Figure 2. Subsidies by the Malaysian government are fertilizers.
1 Subsidies and equilibrium in market Suppose that the government provides subsidy of RM1.50 each from the total subsidy of RM1. Figure 2.50 BUYER 1.50 per gallon and 1 million gallon of petrol.00 per gallon of petrol is shared equally by buyer and seller. The benefit from subsidy of RM1. SS1 intersects with demand curve.00 per gallon.00 per gallon would shift the supply curve to right from SS0 to SS1 and equilibrium price drops to RM1. The effect of subsidy of RM1. DD at price of RM1. A subsidy of RM1.5.00 per gallon on equilibrium price and quantity is illustrated in Figure 2. respectively. respectively.00 and the price the seller receives is at RM0.00 SELLER DD 0.2 Quantity (gallon) The initial equilibrium price and quantity for petrol is at RM1.7 : Subsidies and equilibrium price and quantity in market Price (RM per gallon) SS0 SS1 1. the equilibrium price and quantity for petrol is RM1.00 per gallon and quantity of 1. The buyer and sellers shares RM0. 23 . The price the buyer pays is lower to RM1.50 1 1. This would increase the supply and shift the supply curve to SS1 as shown in Figure 2.00 per gallon for petrol.7. The new equilibrium occurs when new supply curve.2.7.50 per gallon and 1 million gallon of petrol.00 per gallon while quantity at 1.2 million gallon of petrol.50.2 million gallon of petrol. Before the subsidy.
24 .Metta said the decline the decline in LPG prices had been taking place as analysts forecast. ‘When that happens. However. one yaer ahead of schedule. Director of the Energy Policy and Planninf Office.2. they would not only move according to the market. of which 1. Metta Banturngsuk. Metta said.5. As a result.2 CASE STUDY Cooking Gas Subsidy Slated To End In Second Quarter The governments plans to end the subsidy for cooking gas in the second quarter of this year when the world price of liquefield petroleum gas is expected to fall below US$250 per tonne. unpaid subsidies for petrol and cooking gas prices stood at 2. or about 139 million baht per month.76 billion baht. the subsidy through the state oil fund had been reduced to 67 satang per kg. Mr. said the global price of LPG or cooking gas had fallen by $65 to $265 per tonne in the past month. The oil fund remains in deficit at 169 million baht. The remainder was for petrol during the pricecapping exercise that took place between Jan 10 and March 3. in line with the Energy Ministry’s policy to liberalise cooking gas prices sometimes this year. Mr. The oil fund currently has a capital of 2. but the change would encourage more efficient and economical use of gas and help reduce the oil fund’s debt. As of March 8. the retail price of cooking gas remained unchanged at 15. the subsidy is no longer needed.81 baht per kg.59 billion baht. and prices were expected to continue falling to below $250 per tonne in the second quarter this year.23 billion baht was for cooking gas.’ he said. Once cooking gas prices are freed up.
30 per gallon. In figure 2. 25 . respectively. the buyer benefits more than seller since the demand is very inelastic than supply.00 per gallon is shared by buyer (RM0.20 per gallon and the price the seller receives is RM0.30 and the buyer enjoys only RM0.5.3 Effect of elasticities on subsidy As same in the tax the benefits shared by buyer and seller from subsidy depends upon the elasticity of demand and supply. And as we say.80 per gallon and the price seller receives is RM 0. Total subsidy of RM1.70) and seller (RM0. The initial equilibrium price and quantity is RM1. After the subsidy of RM1. As shown in Figure 2.8(b) the seller would benefits more from the subsidy than buyer as demand is more elastic than supply.2.50 per gallon.50 per gallon and 1 million gallon of petrol.30).8(a).70 per gallon and the buyer enjoys only RM0. After the subsidy is given the new equilibrium price is RM0.00 is given.50 per gallon. the price the buyer pays is RM1. the seller enjoys the subsidy of RM0.
respectively.30 per gallon.80 0.70 and RM0. the buyer enjoys more benefits from subsidy than seller.8(b) : Demand is More Elastic than Supply SELLER In (a).8(a) : Demand in Inelastic to Supply Price (RM per gallon) SS₁ SS₂ 1.50 SELLER DD₁ 1 Quantity (gallon) Figure 2.30 per gallon. The buyer’s share of subsidy is RM0. The seller’s and buyer’s share the total subsidy of RM0.Price (RM per gallon) SS₁ SS₂ 1. In (b) the seller enjoys more benefit than buyer as demand is more elastic than supply.20 0.70 DD₁ Quantity (gallon) Figure 2.50 BUYER 0. 26 .5 BUYER 1.70 per gallon and seller’s share is only RM0. the demand is very inelastic than supply.
subsidies and price controls. also give a high investment rates and the openness to trade. This is approved for a half century. Encourage Public-Private Partnership. Embrace talent. Mutual respect and individual dignity. we have enjoyed both tremendous prosperity and relative economic equlity thanks to the policies pursued by our democratics parties. health care and education. Private sector-led growth. high value added economy. Retain and attract skilled professionals. Promote competition across and within sectors to revive private investment and market dynamism. Greater confidence in the robustness of the economy. Equal and easy access to information. It does generate higher economic growth due to legal protection of property rights. and encourage competition between localities. Localized autonomy in decision making.0 CONCLUSION As a democratic countries we need to apply a mixed economy in our system. We could conclude that the benefits being distributed equally to the citizen which represent our country and to the business itself.3. 27 • • • • . More choices and higher purchasing power Economic growth : • • • Confidence in the openness and fairness of government tenders. both local and foreign. needed to spur an innovative. Favor technologically capable industries and firms. This is clearly shown as below: Citizen : • • • • • • Better quality of life reward for innovation and creativity. Empower state and local authorities to develop and support growth initiatives. In line with the progression our nations used their relative wealth to ensure a high standard of living for their citizens high wages. Grant incentives to support innovation and risk-taking to enable entrepreneurs to develop higher value added products and services. Fair Market Pricing with minimal exceptions. Living and working in safe surroundings.
Benefits and Advantages : Advantages of Mixed Economy. Deviga. from http://wiki. Karunagaran. Selangor : Oxford University Press.com/Q/What_are_the_disadvantages_of_mixed_economy _system 28 .ht 5. Deviga. (2008).answers. Retrieved April 20. Principles of Economics. Admin. & Karunagaran. Micro Economics. Microeconimics. Copyright 2012. What are the disadvantages of mixed economy.M. from http://benefitsandadvantages.V. Selangor : Oxford University Press. (2007). 2. 2012. 3. Johor Bahru : Oxford University Press.M.com/general/advantages-of-mixed-economy. 4. & Rohana Kamaruddin. 2012. Retrieved April 20. (2012).V. Copyright 1996-2010.4.0 REFERENCES 1. Azizah Daut.
1 : Difference between price ceiling and price floor 14 29 .LIST OF TABLE Table 2.
3 Figure 2.1 : Fixing the price below the equilibrium level creates an excess in demand or shortage 9 Figure 2.8(b) : Demand is More Elastic than Supply 30 .8(a) : Demand in Inelastic to Supply Figure 2.7 : Effects of subsidy : Subsidies and equilibrium price and quantity in market 21 22 23 26 26 Figure 2.6 Figure 2.4 : The efficient outcome in the price of low-cost houses in Malaysia : Excess supply of unskilled labours in the market .5(a) : Demand is Inelastic to Supply Figure 2.2 Figure 2. : The government revenue is the portion of A and B 10 12 16 21 Figure 2.5(b) : Demand is More Elastic than Supply Figure 2.LIST OF FIGURE Figure 2.