Sugar Subsidy Reduced

This article is taken from the Star Newspaper dated 29th September 2012 written by various consumer groups and Fomca Chief Executive Officer regarding the subsidy that was reduced for the sugar commodity. The decision that was taken to do this was done by our Prime Minister Y.A.B. Datuk Seri Najib Tun Razak during the discussion on the 2013 budget. The reduced subsidy has caused an increase of 20 cents leading the price to a high RM 2.50 per kilo. The price of sugar has increased 4 folds since January the 1st 2010. Sugar is a controlled item in the governments watch list. In the same article regarding the same issue the rise in the price of sugar was also made to curb the issue that is plaguing the nation’s health since 2.6 million Malaysians are diabetic and this is an alarming number since 1 out of 5 Malaysians are affected. The reduction in the subsidy by the government is for the best of the nation. But I would like to agree and disagree on some of the issues stated in this article.

A reason to why I would agree on this article is the relationship between the price of sugar and the quantity demanded for sugar. In economics the quantity demanded is the amount of goods that a consumer is willing to pay for it given at a certain price and certain time. An easier way to explain how this relationship can be understood is by looking at the law of demand. In the economics text book it states that the when the price of a good or service is higher the quantity demanded will be lower, but if the price is lower the quantity demanded will be higher. Since sugar is an inelastic good the demand curve is a vertical curve making it an inverse relationship when the calculation is done. In conclusion the decision made by the government to reduce the subsidy is a wise move in an effort to reduce the consumption of sugar by Malaysians.

In the article it states that the government has allocated a large sum of RM 278 million for the subsidiary of sugar. In the same note such an allocation to reduce the subsidy is still going to affect the coffee shop owners by having to pay an extra 80 ringgit per month. The move is said to have affected the coffee shop owners just a bit in the short term, however the move to further increase the price is warned by the President of the Coffee Shop Association because of the Competition Act.

According to the law of demand if the price increases the quantity demanded will decrease keeping that income, taste and the price of substitute good remain the same and in accordance to the article the price hike of sugar will cause the quantity demanded to decrease. Another principle that can be looked at is the substitution effect. In substitution effect if the price of the substitute is lower than sugar the demand curve will shift to the right expressing a higher demand for the substitute. And the only substitutes for sugar are honey and artificial sweeteners which are more expensive and pose a health hazard.

Another principle that can be applied is the income effect. Income effect is the price of a good or service that rises relative to income, people can’t afford the products they had previously bought, so the quantity demanded of the good or service decreases. When income increases, people are able to spend or buy sugar without worry because of their disposable income.

The part that I would like to disagree on, is the role played by the retailers on increasing the price of sugar. In the event of such, suppliers will decrease the quantity supplied of sugar, this will cause the quantity demanded for sugar to increase. This will increase the shortage of sugar. The law of supply implies that the higher the price, the greater the quantity supplied and the lower the price, the lower the quantity supplied. In the event where there is a shortage of sugar, the price of sugar will increase. This is where the government steps in to interfere and find a solution in hopes to balance the price. The step taken is known as the price ceiling
Price ceiling or price caps are regulations that make it illegal to charge a price higher than a specified level. The move done here is not to cause any inconvenience to the retailers but a move to make the lives of people easier to prevent suppliers from being dishonest to the people. In the event where a seller tries to price a packet of sugar well over the reduced subsidised price the reaction that will be received won’t be of a positive one but a reaction that can lead to many negative scenario’s.

In conclusion, I think that the article has its own positive and negative sides to it. With all said and done, the move made by the government is done with the people’s interest best at heart. And even with the rise in price of sugar it is the people’s initiative to see the problems that can affect an individual’s health on the consumption of sugar. So before you think of having your next cup of teh tarik or sirap bandung think of the repercussion that the added sugar will do in your body.