Do we have a responsibility to reduce carbon emmissions?

In his press briefing in Australia on the 16^th of November 2011, Mr. Barack Obama; president of United States, showed his support for the Australian Carbon tax pronouncing it a bold strategy and expressed his concern for climate change stating that ‘human activity was contributing to it and that we have a responsibility to reduce our carbon emissions’.

Global warming and climate change has become one of the most widely talked about topics in the past few years and many believe that increased carbon emissions through human activity causes the temperatures to rise and could have a negative impact on our environment. Since 1970s, human activities such burning fuel, gas, coal; has caused average temperature to rise by 0.4c with the carbon dioxide level at 386 ppm (parts per million) now, and if it continues to rise at the present rate, it could cause sea levels to rise, affecting agriculture and water availability adversely and destroying the habitat of animals and plants. As Mr. Obama said in his speech we are responsible to reduce these emissions, if we were to sustain the current environment, thus governments need to intervene and adopt the most efficient means to combat climate change and reduce carbon emissions.

One way in which carbon emissions could be reduced is by adopting an environment tax. Definitions of green taxes include Pigouvian and indirect taxes, on goods whose use can damage the environment such as excise taxes on gasoline; and environmental related provisions in other taxes. Indirect taxes aim to reduce carbon emissions by increasing the cost of production and raising the price, thereby reducing the supply and usage of the good detrimental to the environment. Pigouvian taxes set rates according to the amount of greenhouse gasses emitted, which are negative externalities:(third party effects or spillover effects), and aims to internalize the externality by increasing the firm’s marginal private cost until it equates with the marginal social cost.

The diagram above illustrates how a Pigouvian tax such as carbon taxes reduces the usage of goods that are harmful to the environment and leads to the socially optimal level of output. In the free market without the tax, the firms would be producing an output of Qp at the market price where their marginal private cost equals marginal private benefit. But at this output, pollution exists to an extent that is not socially favorable. Thus, governments should levy a tax, which increases the first firm’s marginal private cost to the marginal social cost. This would reduce the quantity traded to Qs, the socially optimal level of trade and increase the price to the optimum price, thereby making the polluter pay.

The greatest advantage of taxes is that, encourages firms to find cleaner ways of production. As the cost of production rises and ultimately the price of their products rise, firms would see a decrease in the quantity demanded, and firms who wish to be competitive would need to find more environmentally friendly ways of production. Whistle’s Meadow Park in Canada, installed solar panel and a geo exchange system because of the carbon tax, and this has greatly reduced propane consumption in their community center.

Despite Mr. Obama advocating the Australian carbon tax, it comes at a cost to both the consumers and producers. The environment taxes have the disadvantage of reducing consumer welfare. This is because producers are able to pass the tax on to the consumer depending on the price elasticity of demand, which would result in the consumers having to pay a higher price.

Also, the raised prices could mean the producers lose competitiveness to those who do not have a carbon taxes imposed up on them. The Australian car industry forecasts the carbon tax would increase their production cost by $412 per vehicle and would undermine further investment and their ability to sustain jobs. This could even lead to a decline in exports and increase in imports of cars.

We also need to take into account that setting a tax in such a way that marginal private cost equal to the marginal social cost is going to be difficult. Government bodies that set the tax may not know what the optimal social cost should be.

Another policy as Mr.Obama mentioned, which could be used to reduce carbon emissions, is the cap and trade system or the carbon trading system. Under this system, an emission limit is fixed and then individual companies/countries are given/or has to purchase carbon credits which allows them to emit certain levels of carbon dioxide. The EU Emissions Trading System(EU  ETS) is the biggest such scheme in the world covering 30 countries and 11000 power stations. This system is efficient because, it allows companies who fall short of their carbon cap to sell their carbon credits to those companies who exceed their limits. This could encourage companies to be more environmentally conscious and reduce their carbon footprint just so that they could sell these permits to those companies who have trouble keeping carbon emission levels below the cap.

But this system has its limitations because setting a carbon cap at the optimum level would be difficult. If the cap were set too high, it wouldn’t encourage producers to finder cleaner ways of production. And if it was set too low it could hinder economic growth. The EU ETS, has gathered a lot of criticism because; many believe that in some industries there are too many allowances and companies are able to sell their carbon credits for a great profit, also the price of carbon credits dropped to 0 during 2006 and it is likely to happen again, and companies in the energy intensive sectors have moved out of Europe to avoid these carbon limits (Carbon Retirement n.d), these factors would affect Eurozone growth rates.

The factors above would help to curb carbon emissions to some extent but a better suited long-term strategy to address climate change would be a strategy such as the one which Americans have adopted, investing in clean energy research such renewable energy sources which emit little or no carbon. This is because the both environment taxes and, cap and trade systems, still emit carbon into the atmosphere contributing to climate change whereas the renewable sources are more environmentally friendly.

There are other methods too to reduce our carbon emissions, such as carbon offsetting planting trees to offset the carbon emitted but many see this as an approach to not change our ways. Carbon Capture and Storage whereby carbon emissions are captured in the plants and stored underground is also one strategy, which we could adopt, but this strategy is expensive.

It is also worth pondering on Mr. Obama’s accusation that human activity is contributing to climate change. A research observed climate changes since 1850 is linked to predictable and cyclical, naturally occurring events in Earth’s solar system with little or no help from us. Thus, carbon emissions into the air may have a far less impact on climate change than what most people believe.

Burberry - Iconic British Luxury Brand Est. 1856

According to the Burberry official weblog, they have shared one of their latest news on May 31, CLICK ME FOR MORE INFO which announced that Burberry is embarking on a store opening spree in Brazil and Mexico this year as the British brand targets up-and-coming luxury markets.

Burberry is a British luxury fashion house which distributing fashion clothing, fashion accessories and perfumes.  In British, using a Burberry is very common especially its iconic trench coat. And now, Burberry has announced their latest product, the new automatic power reserve watch. Burberry can occupy so many areas of fashion because their demand is very huge and stable. As title, Burberry is a 156 year-old global luxury brand. It has a huge number of loyal followers since last century. Many consumers are willing to buy their products because their own preferences, the population of Burberry and also the iconic, an icon that state your wealthy and your fashion sense.

Due to demand is high and stable, producer have set a high price for their products to maximize their profit. It is because the demand for Burberry is inelastic which means that the price up will only  decrease a little amount of quantity demanded, but will increase greater the quantity supplied and the total revenue will increase too.

The graph at above has showed the price elasticity of Burberry is inelastic. It is because when the price of Burberry luxury has increased from P1 to P2, the quantity demanded of Burberry luxury decreased but the quantity of Burberry luxury in market has increased from Q1 to Q2. And because the percentage decrease in the quantity demanded is less than the percentage increased in price, therefore it is inelastic.

Besides the loyalty of consumers, the substitution is one of the reasons why the quantity of demanded is increase. Hermes and Chanel luxuries are very expensive and not many people can afford them. According to the substitution effect, when the relative price of a good or services rises, people seek substitutes for it. Therefore, Burberry has become substitutes and the quantity demanded increase. On the other hands, there also have consumers who cannot afford to buy Burberry luxuries, will seek for another substitutes which they willing and afford to buy. Such as Coach and Carlo Rino, the price of them is slightly higher than other normal goods but cheaper than luxuries. They are more suitable for those who cannot afford luxuries but request something better than inferior goods, such as night market goods.

According to the law of supply, when other things remaining the same, the higher the price of a good, the greater is the quantity supplied. However, Burberry has made a different decision which many other luxuries companies will do so. They decided only produces limited goods due to the quantity of products in market more than the quantity of demanded in market, the price of goods will fall.  Therefore Burberry luxuries produce in limited quantity to make sure they can always sell at a high price to earn maximum profit.

Because of the population of luxuries, the quantity demanded for normal goods or inferior goods will decrease and by that time government will set up tax on luxuries. When an item is taxed, its price might rise by the full amount of the tax, by a lesser amount or not at all. If the price rises by the full amount or by a lesser amount than the tax, buyers have the burden of the tax, which means that they have to pay more. It will decrease the quantity demanded of luxuries because the price is rise and according to the law of demand, higher price the good selling, lesser quantity of that good is demanded. Those consumers who cannot afford the higher price will look for normal goods as substitution of luxury. At the end the quantity demanded of normal goods increase.

However, the tax elasticity of demand and supply on luxuries is always inelastic. It means buyers always pay the greater amount of tax or perhaps entire tax. It is because when consumers afford to buy a luxury, they will not mind to pay a little more on tax. They just aim to get what they want to, the tax was not a big deal for them. In fact some of the wealthy consumers willing to pay more tax to show their wealth they are. Therefore normally producers of luxuries will just move all the tax to let consumers to pay it.

Because of the tax, price of Burberry luxury has increased from P1 to P2, and the demand has decreased from D1 to D2, the quantity has decreased from Q1 to Q2. Due to the percentage decrease in quantity is lesser than the percentage decrease in price, therefore Burberry luxury is an inelastic demand.

Different from any other categories, Burberry usually doesn’t face any problem of shortage. First of all there are many substitutions in market that is selling same kind of goods with them. Such as Louis Vuitton and Prada are also selling fashion clothes, accessories and perfumes. Besides that, they might happy to see the shortage happens therefore they can raise the price of goods to maximize their profit. And the shortage will give social an opinion that Burberry luxuries are very hot and selling fast all the time. It might increase the quantity demanded of Burberry luxuries.

Burberry also working hard on propagates their population. They hire celebrity to promote their goods, such as advertisement, short video, and so on. Next, they are having company celebration among the year, by celebrating they had hit the new highs, broke last year’s record and others. Beside that Burberry will also sponsor goods to charity as charity bazaar to collect funds or donate an amount of their profit to those orphanages. Of course they will organize a fashion show to let the world know their latest products. These all things are spreading their name to the world to increase their population. It is helpful to increase their demand and maximize their profit.

Is the oil prices going down?

In the World Gas Conference held on the 7^th of June, Chief Operating Officer and Executive vice-president of Patronas: a Malaysian government owned corporation, Datuk Wan Zulkiflee Wan Ariffin, predicted that oil prices would be declining. As oil is one of the major sources of energy and a commodity that many industries such as manufacturing, transportation, energy and pharmaceuticals, are reliant up on, the fluctuations in oil prices would have important ramifications on these industries. Thus, it is important to see why the prices are expected to decline and the effect of this on those depending on oil.

Just like other markets, the global price of oil is also determined by the price mechanism, the interaction of demand and supply. Hence to forecast the changes in oil prices, we need to look into the factors that affect the demand and supply for oil and look into the price elasticity of the demand and supply of oil.

As Mr. Datuk Wan Zulkiflee Wan Ariffin mentioned, economic uncertainty would have an impact on the price of oil as there is a strong correlation between the demand for oil and the rate of global economic growth because oil is an essential input for many industries. In the second half of 2008, when the global economy entered recession, oil prices fell from $147 a barrel to $40 barrel. When there is a slowdown in the economy, where all economic activity is low, industries reliant on oil would reduce their output due to less demand for their goods, and this in turn reduces the demand for oil since it is derived demand. Currently, the world economy is a train wreck with the Eurozone dictated by heavy debts, growing unemployment, low GDP; America with an unemployment rate of 8.2% and low GDP growth forecast; even the emerging markets such as the BRIC nations are expected to have low economic growth. These factors would no doubt affect the demand for oil adversely,

Apart from economic uncertainty, there are other factors which affect the demand for oil, which Mr.  Datuk Wan Zulkiflee Wan Ariffin did not mention. One such factor is the relative price of substitutes for oil. Substitutes are those goods that can be used in place of another good. Substitutes for oil, is limited but there are few sources, which could be used as an alternative of oil. These include renewable sources such as: ethanol, wind energy and solar energy, tar sand and natural gases. But their scope as an alternative for crude oil is limited. According to an article in Forbes magazine ‘ethanol is dependent on huge quantities of sugar cane or corn’, and ‘tar sand takes 1000 cubic feet of natural gas and it requires lot of water to produce a barrel of what equates to sour crude which is also difficult to refine’. He also states that ‘although wind and solar energy has its place, it is insignificant and cannot be used as raw materials for pharmaceuticals and plastics’. But research and development is being carried out to find a successful alternative for oil, and if they succeed, we would see oil prices fall as demand for oil decreases.

One of the most important factors that affect the demand for oil is speculation and hedging; purchasers buying with the hopes of selling them at higher price. In the oil market, ‘traditionally hedging refers to those with a commercial interest and exposure to physical commodity’ whereas speculation refers to those trading futures contracts-agreements among two party to sell a given commodity at an agreed upon date in the future.  Speculators look into the demand and supply side factors affecting oil prices, and based on this they would be trading. If they think the world economy is slowing down and oil prices are going down, they may sell their oil shares now to gain higher profits. Or if they think those oil prices are going to rise they may buy more now hoping to gain higher returns in the future.

Supply side factors such as external shocks; closure of oil rigs and terrorist attacks, influence the price of oil as it decreases the quantity of oil available. The Yom Kippur War of 1973 saw Egypt, Syria and their neighboring countries placing an embargo on the supply of oil to US and other western counties, because US backed Israel. This lead to a huge decrease in the supply of oil and oil prices skyrocketed. Currently, there are fears that the Iranian nuclear development program would accelerate oil prices. This is because, Iran: the 3^rd biggest oil producer in OPEC, has sanctions imposed on them by the United States and European Union which include bans on Iranian oil imports. Also, there’s threats of an Israeli attack, and ‘Iran’s threats of closure of the vital artery of the Stait of Homuz’ which could turn into a much wider war than just a broader conflict with Iran. These factors could mean repetition of history, with oil prices escalating due to low oil supplies as in the 1973 Yom Kippur war. Also growing skepticism of oil supplies could mean countries stockpile oil now, which decreases the current supply of oil and increases the price. This contradicts Mr. Datuk Wan Zulkiflee Wan Ariffin’s prediction that oil prices would fall.

But the extent to which the aforementioned points affect the oil prices depends on the price elasticity of demand and supply, which is about how the demand and supply respond to changes in the prices of oil. As mentioned above, oil has relatively few substitutes that could be used, this implies, that even though the price of oil changes, the demand for oil is likely to changes less than proportionate to the change in price making the demand for oil rather price inelastic. On the other hand supply of oil also remains price inelastic because in the short run, supply depends on proven oilrigs and reserves. The price inelasticity of demand coupled with price inelasticity of supply explains why the oil prices are so volatile. The diagram1 shows, demand and supply which is price inelastic, and a shift of the demand curve to the left (decrease in demand) due to declining economic growth, and a shift of the supply curve to the left (decrease in supply). According to the diagram, the price increases but the increase in price is not that significant, but we need to consider that the actual change in price will be determined by how much the demand and supply changes and the level of price inelasticity of demand and supply.

There are other forces too, which influence oil prices. Governments may intervene to stabilize the price volatility and may impose price caps to ensure that the oil prices remain more or less the same. Also OPEC- the organization of petrol exporting countries may intervene as it has in the past. Thus, Mr. Datuk Wan Zulkiflee Wan Ariffin, statements is true to some extent, but since there are other factors that influence the price, these should all be considered before we see the final impact on oil prices.

Smartphone Hits New High in year 2012

According to the article which uploaded on apple press info library on 24^th September 2012,
CLICK ME FOR MORE INFO they have announced that their latest product iphone 5 has sold over million in three days and over 100million user have been updated with their latest operating system- IOS 6. It shows the population of smart phones is much greater than last few years. Especially among Gen-Y, most of them are holding a smart phone and some of them maybe more than one. The population in between them is great enough to make you look weird if you don’t have a smart phone. To avoid from being abnormal, many people willing to buy a smart phone and the quantity demanded increase and increasing with a very high speed.

According to the Malaysia budget 2013, there is a RM200 rebate for smart phone purchase for those aged 21 to 30 years. This may encourage more teenagers to purchase smart phone.  It is because the rebate has decreased the amount that consumer have to pay. The law of demand states that when other things remaining the same, the lower the price of a good, the greater is the quantity demanded. Therefore, the quantity demanded of smart phone will increase because the price of smart phone is cheaper.

According to the graph above, due to the subsidy from government (rm200 rebate), price of smart phones have decreased from P1 to P2 and the quantity demanded increased from Q1 to QD2. According to law of supply, the quantity supplied supposed decreased from Q1 to QS2, however government have pay for the gap between P1 and P2, therefore quantity supplied remain at Q1.

Next, people who have higher income will have ability to buy a better good beside of buying an inferior good. Such as smart phone, consumers who have higher income will choose to purchase an Iphone because it is like purchasing Louis Vuitton or Chanel in fashion luxury, it is branded and expensive. It can show others how wealthy you are. For those who not afford to buy a smart phone, they may buy a cheaper phone which is an inferior good. As the income and quality of life are increasing, people will decrease the demand of the inferior goods to improve their life. Which means that people will reject to use nokia 3310 if they able and afford to buy a Samsung Galaxy s3.

Beside demand, supply of smart phone also a reason which caused smart phone hits new high. The price of smart phone is higher than other phone. According to the law of supply, when other things remaining the same, the higher the price of a good, the greater is the quantity supplied. Therefore, supplier increased the quantity they willing and able to supply. However, the technology which used to produce a smart phone that may changes suppliers’ plan. It is because the technology is limited and couldn’t change in a short time.

For examples, iphone5 was announced at the Yerba Buena Center on September 12 2012 and available for pre-order on September 14 2012. One week later after the iphone5 was announced over two million orders had been taken just on September 14 and five million in the first three days of its release. Apple Inc claims that they couldn’t produce so many iphone5 in time because they don’t have enough inventory and technology to speed up the process. Therefore consumers have to wait until the middle or the end of October to get their new iphone5.

Due to the technology is limited, there are many shortage problems happened in smart phone market. Shortage forces the price up because consumers cannot force producers to increase their output immediately. Powerful forces operate to increase the price and move it towards to equilibrium price. According to the law of supply, when other things remaining the same, the higher the price of a good, the greater is the quantity supplied. Supplier will increase their output to maximize their profit. On the other hand, the law of demand which claim that when other things remaining the same, the higher the price of a good, the smaller is the quantity demanded. Consumers will decrease their quantity demanded because the price they have to pay is higher. The quantity of demanded will reduces until it reached market equilibrium.

          

The demand of a smart phone also depends on loyalty of consumers. Such as iphone5, even though it is selling at a very high price and have to wait for a long time, there are still many consumers willing to purchase it. It is because iphone5 is one of the apple product, they just cannot wait to grab it as one of their collections. When income is increased, consumers will not purchase more smart phones because holding a smart phone is already enough for them. The income elasticity of demand of iphone5 is inelastic because the percentage change in quantity demanded is lower than percentage change in income and the total revenue increase.

The elastic of supply of smart phones is measured by the percentage change in quantity supplied divide by percentage change in price. As the price of smart phone is rising, the quantity supplied had increased. However, the technology issues have brings a lot of restriction and limit for supplier to increase their product. Therefore the elastic of supply of smart phones is inelastic which means the percentage change in quantity supplied is smaller than the percentage change in price and the total revenue increase.

MInimum Wage Implemantation in Malaysia

   With reference to newspaper article by Liz Lee titled ‘Minimum Wage could kill SMEs’, the author writes about the dangers or implementing minimum wage. However, the author only focuses on the down side of minimum wage towards SMEs and not on the benefits of it in the long run.

   The minimum wage in Malaysia has been set to RM 900 per month or RM 4.33 per hour. Why do governments implement minimum wage? The main aim of a minimum wage is to reduce poverty and the exploitation of workers who have little or no bargaining power with their employees. When minimum wage is implemented in a country, the labour cost within that company will increase. Therefore, depending on the size of the company, the implementation of minimum wage will affect production and may lead to unemployment.

   In Malaysia, the amount of small and medium-scale enterprises (SME) is plentiful. Based on the nature of Malaysian operations, most of the SMEs consist of labour-intensive production. With that said, it is obvious that the implementation of minimum wage would affect SMEs drastically. The ratio of labours to machineries used is large and therefore a slight increase in labour cost would have a huge impact on the production cost of an enterprise. This will force SMEs to shut down and stop production due to unbearable costs. In addition, SMEs only obtain a net profit of 3 per cent to 5 per cent. An increase in salaries paid to workers will take up a large proportion of profits gain. At this rate, SMEs would only be able to make ends meet or shut down completely due to the higher manufacturing cost.

   Besides that, SMEs should be protected because they are the supporting industry to many multi-national companies. Therefore a chain reaction between these enterprises will lead to a further increase in prices. In contrast, before minimum wage is implemented, the government should first spread awareness to the people about the true definition of minimum wages and the advantages and disadvantages that could be faced. In a positive view, the implementation of minimum wages could bring about better economic growth and increase productivity of labours. Increase in economic growth could be achieved as people consume more from an increase in disposable income. The lower income groups with more allowance now have the means to enjoy more goods and live better lifestyles. On the other hand, an increase in wages for the lower income group could also create incentives for them to work better. Labours may feel more appreciated and thus work more productively or longer hours. Minimum wage could also promote dynamic efficiency. From a firm’s point of view, a minority of economist argue that the minimum wage will give employers incentive to train employees so as to increase their productivity, given that they have the means to provide training for employees. This means that minimum wage encourages firms to invest in both labour and capital which will also lead to higher economic growth. Therefore, an increase in minimum wages may benefit enterprises to a certain extent.

   On the flip side, the implementation of minimum wage has disadvantages towards consumers, labours and firms. First and foremost, minimum wage may lead to unemployment. Some firms may choose to cut down on labours in order to maintain the same labour cost as before the minimum wage is implemented. The effects of minimum wage can be shown in the diagram below:

When the wage rate is above the equilibrium level, the quantity of labour supplied exceeds the quantity of labour demanded- there is a surplus in labour. In other words, people are left unemployed. The diagram above shows the section of unemployment caused by minimum wage. Moreover, the setting of minimum wage also causes distortion to the way the labour market works because it reduces the flexibility of the labour market and changes the equilibrium point of demand and supply of labour. Therefore, such negative impacts of minimum wage could burden SMEs even more because they have no choice but to cut down on labour and this will disrupt production.

   On top of unemployment, minimum wage also brings about the issue of market failure. In a labour market, the supply curve measure marginal social cost of labour whereas the demand curve measures the marginal social benefit from labour. The benefit is the value of goods and services produced. An unregulated market allocates the economy’s scares labour resources to the jobs which they are valued most highly. Therefore the market is efficient. However, with the implementation of a minimum wage, the market mechanism is agitated and results in an increase in job search and unemployment. Moreover, the amount of worker’ and firms’ surpluses will decrease and the potential loss from job search will increase, making the market inefficient. This market failure will inevitably affect SMEs and the economy as a whole. In addition to that, high unemployment rates will also lead to the growth of black markets as people look for alternatives to earn for a living. From the graph, any labour cost below the minimum wage will result in black market. This type of market failure cannot be avoided because it is not easily detected by the government.

   According to the article, “..employers were still not sure if the policy covers allowances and benefits.”. Depending on whether or not a person is employed or unemployed will determine whether or not minimum wage will benefit them. For example, a person who continues to be employed after the implementation of a minimum wages will benefit from it because now his or her pay has increased. However, if an individual is unemployed, he or she will receive no form of benefit from this new regulation by the government.

   Nevertheless, in my opinion, the implementation of minimum will increase economic growth in the long run. In the short run, firms and individuals ought to bare the consequence in order for growth to take place. Minimum wage would reduce poverty level in a country and will increase the average income. In Malaysia the implementation is said to be done slowly, the government is doing so by implementing a low minimum wage of RM900. By doing so, SMEs and individuals do not feel the pinch of the new regulation and can adapt with time.

Jessica Chow Ann Kay (1101ah13308)

The implementation of GST in Malaysia.

   With reference to The Star Newspaper, dated 17 September 2012 from an article titled ‘Why the GST may not be such a bad thing after all’ written by Nicolaos Giannopoulos, the author explains the benefits of GST. However in my point of view, there are two sides to this new tax system.

  

   Goods and services tax (GST) is an indirect tax on expenditure. GST also known as value added tax (VAT) in many countries such as the United Kingdom, France, Denmark, etc. is a consumption tax imposed as a percentage of the value of the good on every level of a product. The amount of tax charged is fixed in every level and is ultimately borne by the end consumer. On the other hand, the current tax systems on goods and services practised in Malaysia are sales tax and service tax which is a single-stage tax levied on goods and services which range between five to ten per cent. 

   As stated in the article, Malaysian consumers are not aware of how much sales tax they pay in the price of the goods they purchased. This statement is agreeable to because unlike GST, sales and services tax varies between products and is charged twice. For example, a person who purchases a can of beer in a restaurant will be charged a service tax of the restaurant on top of a sales tax charged by the manufacturer for a can of beer. If GST is implemented, consumers would only be charged for tax once.

   In addition to that, the proposed GST rate in Malaysia is 4 per cent. Given that the GST rate is lower than the usual 5% to 25% levied in other countries, Malaysian need not worry about major increment of current prices of goods and services because the implementation of GST is Malaysia is to be done slowly and steadily.  However, GST is to be charged on all goods and services unless specifically exempted (negative concept). Therefore, the prices of most goods and services will increase with the implementation of GST. Basic goods are subjected to GST in order to look out for lower and middle income earners. As done by Australia, the Malaysian government has decided to do the same.

   The tax burden of goods and services will wholly be passed down to consumers only. Therefore, consumption by individuals may be affected if the tax rate is high. The relatively low 4% GST rate proposed in Malaysia may be able to offset the tax burden on consumers because the tax is no longer shared between buyers and sellers. On a totally different note, GST rates will also affect production of firms. In Malaysia, the existence of small and medium enterprises (SMEs) are plentiful. GST not only affects big businesses, but also the SMEs. If the price elasticity of demand of goods produced by a firm is elastic, sales of the firm will decrease with the implementation of GST because consumers will alternate to buy goods which are cheaper. Therefore, larger businesses that have the advantage of economies of scale will have the upper hand with the implementation of GST. SMEs in Malaysia may suffer losses as their products are marked down and production will decrease.  However, GST compliance requirement and threshold will be set by the government for businesses with a smaller annual turnover.

   With the implementation of GST, the government will have to bring about income tax and corporate tax cuts. It is suggested that both these tax cuts were positive steps in the Australian economy when GST was implemented in year 2000.   “They gave individuals and incentive to work longer while paying less tax and the business sector was seen as more competitive by international investors because of the lower company tax rate”. This statement is agreeable up to a certain extent because behaviours of individual and firms may not follow as the we assumes. For instance, with lower income tax, an individual may choose to work fewer hours if they are currently content with their earnings. In other words, income tax cuts may also create incentive for individuals to work fewer hours. On a totally different perspective, lower corporate tax will increase competitiveness of Malaysian businesses because the corporate tax imposed in our neighbouring countries is relatively lower. This step will therefore boost confidence of local businesses to compete internationally.

   With reference to the article, Australian exports were subjected to GST and with the removal of wholesale tax, Australian exports were more competitive in the market. Similarly, Malaysian exports will be more price competitive internationally with the removal of wholesale tax. In a microeconomic view, firms and business will then increase production as export sales increase. Generally, higher export revenue will lead to economic growth in Malaysia and will benefit Malaysians. Besides that, the shift from wholesale tax to GST had a temporary adverse effect on the economy. As stated in the article, in Australia, purchases of a particular related good were differed or accelerated to take advantage of reduced prices. However, this effect was only temporary. So, businesses may suffer temporary sales during this time.

   GST is a fairer tax system because it covers a wider range of tax payers instead of the present tax system that collects from individual’s personal savings.   “Only when you spend, you pay GST” as said by the author.

"Malaysia has a 12 million workforce and only 1.2 million paid taxes" (Dato' Sri Haji Mohammad Najib bin Tun Haji Abdul Razak, Star Online, 2011)

   GST certainly broadens the tax base. Besides that, GST also increases funding for Government projects which will benefit Malaysians. With more government revenue collected, the government can focus on providing aid for SMEs, developing better infrastructures, etc. In the long run, nobody will be worse off with the implementation of GST.  

Jessica Chow Ann Kay (1101ah13308)