According to the article “Sugar Subsidy Reduced” dated September
29, 2012 by The Star, the Government proposed to reduce sugar subsidy 20 sen
per kilogramme to 34 sen as one of the move to create a healthier nation.
Subsidies
are payment made by the Government to a produce. Government subsidizing goods
will affect the equilibrium in the market. When subsidies are given to the
producers, the cost of production decreases; therefore, there will be an
increase in supply and the market price will decrease. Lower price paid by the
consumers increases the marginal cost of production and it leads to inefficient
of overproducing
Referring
to the graph above, the line D0
represents the demand curve of sugar and S0
represents the supply curve of sugar before it is subsidize. Equilibrium is
achieved at E0, the
equilibrium price represented by P0
and equilibrium quantity is represented by Q0.
When government provides subsidy to sugar, the supply curve shifts to the right
from S0to S1
and the new equilibrium achieved is at E1,
a new equilibrium price at P1, which is lower than P0and
the new equilibrium quantity increases fromQ0 to Q1.When
subsidy is given, it reduces the cost of production of sugar. Suppliers are
able to produce greater amount of sugar and this leads to lower market price
and consumption of sugar increases. In the new equilibrium, marginal social
cost (on the supply curve) exceeds the marginal social benefit (on the demand
curve) and the subsidy results in an inefficient overproduction. At the
quantity produced with subsidy, which is Q1, marginal
social benefit is equals to marginal social benefit, in which it has fallen.
Marginal social cost has increased and exceeds the market price and because
marginal social costs is greater than marginal social benefit, the increased of
production leads to inefficiency. Besides that, subsidies lower the market
price of a good; hence subsidized producers sell their products in the global
market. The increase in supply in the market will lower the market price;
therefore, producers from other countries will lessen their production and receive
smaller revenues.
Not
only providing subsidies will leads to inefficient overproduction, has it also
aroused health issues such as diabetes. Sugar is an elastic demand product.
When it is subsidized by the government, the price of sugar will become cheaper
and according to the law of demand, when the price of a good decreases, the
quantity demanded will increase. Consumers begin to consume more and lead to
health conscious. Based on an article entitled “Sugar Subsidy Reduced for People’s
Good” dated 2nd October 2012 in the New Strait Times, The Deputy
Minister of Domestic Trade, Cooperatives and Consumerism, Datuk Tan Lian Hoe
mentioned that the reduction of sugar subsidy is not to burden the people but
done for their own good because when the subsidy is reduced, the price will
goes up. Consumers will consume less sugar as well as to practice a healthy
lifestyle.
However,
when subsidy is removed,producers took the advantage to hike up the price of
sugar. In order to prevent this from happening, the Government intervenes and
imposed a government regulation that makes it illegal to charge consumers a
price higher than a specified level known as price ceiling. When price ceiling
is imposed, it has a powerful effect on the market because price ceiling
attempts to prevent the price from regulating the quantities demanded and
supplied. When price ceiling is applied into the sugar market, it creates a
shortage in sugar supplied, search activity as well as a black market.
At
the equilibrium price of the sugar market, the quantity demanded is equals to
the quantity supplied and there is no shortage or surplus of sugar. Anyhow,
when a price ceiling is set below the equilibrium, the quantity demanded will
be greater than the quantity supplied and a shortage of sugar occurs. As a
result, the quantity of sugar available in the market is the quantity supplied
by the suppliers and it must be allocated among the consumers. When the sugar
supplied is limited, buyers have no choice but to search for alternatives and
the time spent to look for it is called search activity. Search activity is
costly because the opportunity cost such as the time spent to search for
alternatives can be long and it could have been use in other productive ways.
In addition, price ceiling also encourages illegal trading in a black market.
Black market is an illegal market where the equilibrium price is higher than
the price ceiling imposed. Suppliers desperately seek ways to increase the
price of sugar because they are unwilling to supply sugar at a low price. The
price at the black market depends on how strict the price ceiling is enforced
on the sugar price. If the price ceiling enforced is loose, the price at the
black market is irregular because buyers can buy from elsewhere. On the other
hand, if the price ceiling imposed is strict, the black market price is equals
to the maximum price that the buyers are willing to pay. This is because the
buyers are desperate to purchase the sugar and it the quantities supplied is
limited.
The graph above shows the inefficiency
of price ceiling. When a price ceiling is imposed in the sugar market, it
results in an inefficient underproduction. The marginal social benefit of sugar
exceeds the marginal social cost and a deadweight loss lessens the consumer
surplus and producer surplus. The rent ceiling is enforced below the
equilibrium price, P1 and the
quantity of sugar supplied, Q1 is lesser than efficient quantity, Q0. A deadweight
loss occurs because the quantity of sugar supplied is less than the quantity
demanded and it also shrinks the consumer surplus and producer surplus. The
potential loss from searching for a close substitute is borne by the consumers
whereas the full loss from the price ceiling is the total of deadweight loss
and the increased cost of search.
In conclusion, both subsidy and price ceiling lead to inefficiency in the
market. Subsidy causes overproduction whereas price ceiling leads to
underproduction.
According to the article “Sugar Subsidy Reduced” dated September
29, 2012 by The Star, the Government proposed to reduce sugar subsidy 20 sen
per kilogramme to 34 sen as one of the move to create a healthier nation.
Subsidies
are payment made by the Government to a produce. Government subsidizing goods
will affect the equilibrium in the market. When subsidies are given to the
producers, the cost of production decreases; therefore, there will be an
increase in supply and the market price will decrease. Lower price paid by the
consumers increases the marginal cost of production and it leads to inefficient
of overproducing
Referring
to the graph above, the line D0
represents the demand curve of sugar and S0
represents the supply curve of sugar before it is subsidize. Equilibrium is
achieved at E0, the
equilibrium price represented by P0
and equilibrium quantity is represented by Q0.
When government provides subsidy to sugar, the supply curve shifts to the right
from S0to S1
and the new equilibrium achieved is at E1,
a new equilibrium price at P1, which is lower than P0and
the new equilibrium quantity increases fromQ0 to Q1.When
subsidy is given, it reduces the cost of production of sugar. Suppliers are
able to produce greater amount of sugar and this leads to lower market price
and consumption of sugar increases. In the new equilibrium, marginal social
cost (on the supply curve) exceeds the marginal social benefit (on the demand
curve) and the subsidy results in an inefficient overproduction. At the
quantity produced with subsidy, which is Q1, marginal
social benefit is equals to marginal social benefit, in which it has fallen.
Marginal social cost has increased and exceeds the market price and because
marginal social costs is greater than marginal social benefit, the increased of
production leads to inefficiency. Besides that, subsidies lower the market
price of a good; hence subsidized producers sell their products in the global
market. The increase in supply in the market will lower the market price;
therefore, producers from other countries will lessen their production and receive
smaller revenues.
Not
only providing subsidies will leads to inefficient overproduction, has it also
aroused health issues such as diabetes. Sugar is an elastic demand product.
When it is subsidized by the government, the price of sugar will become cheaper
and according to the law of demand, when the price of a good decreases, the
quantity demanded will increase. Consumers begin to consume more and lead to
health conscious. Based on an article entitled “Sugar Subsidy Reduced for People’s
Good” dated 2nd October 2012 in the New Strait Times, The Deputy
Minister of Domestic Trade, Cooperatives and Consumerism, Datuk Tan Lian Hoe
mentioned that the reduction of sugar subsidy is not to burden the people but
done for their own good because when the subsidy is reduced, the price will
goes up. Consumers will consume less sugar as well as to practice a healthy
lifestyle.
However,
when subsidy is removed,producers took the advantage to hike up the price of
sugar. In order to prevent this from happening, the Government intervenes and
imposed a government regulation that makes it illegal to charge consumers a
price higher than a specified level known as price ceiling. When price ceiling
is imposed, it has a powerful effect on the market because price ceiling
attempts to prevent the price from regulating the quantities demanded and
supplied. When price ceiling is applied into the sugar market, it creates a
shortage in sugar supplied, search activity as well as a black market.
At
the equilibrium price of the sugar market, the quantity demanded is equals to
the quantity supplied and there is no shortage or surplus of sugar. Anyhow,
when a price ceiling is set below the equilibrium, the quantity demanded will
be greater than the quantity supplied and a shortage of sugar occurs. As a
result, the quantity of sugar available in the market is the quantity supplied
by the suppliers and it must be allocated among the consumers. When the sugar
supplied is limited, buyers have no choice but to search for alternatives and
the time spent to look for it is called search activity. Search activity is
costly because the opportunity cost such as the time spent to search for
alternatives can be long and it could have been use in other productive ways.
In addition, price ceiling also encourages illegal trading in a black market.
Black market is an illegal market where the equilibrium price is higher than
the price ceiling imposed. Suppliers desperately seek ways to increase the
price of sugar because they are unwilling to supply sugar at a low price. The
price at the black market depends on how strict the price ceiling is enforced
on the sugar price. If the price ceiling enforced is loose, the price at the
black market is irregular because buyers can buy from elsewhere. On the other
hand, if the price ceiling imposed is strict, the black market price is equals
to the maximum price that the buyers are willing to pay. This is because the
buyers are desperate to purchase the sugar and it the quantities supplied is
limited.
The graph above shows the inefficiency of price ceiling. When a price ceiling is imposed in the sugar market, it results in an inefficient underproduction. The marginal social benefit of sugar exceeds the marginal social cost and a deadweight loss lessens the consumer surplus and producer surplus. The rent ceiling is enforced below the equilibrium price, P1 and the quantity of sugar supplied, Q1 is lesser than efficient quantity, Q0. A deadweight loss occurs because the quantity of sugar supplied is less than the quantity demanded and it also shrinks the consumer surplus and producer surplus. The potential loss from searching for a close substitute is borne by the consumers whereas the full loss from the price ceiling is the total of deadweight loss and the increased cost of search.
In conclusion, both subsidy and price ceiling lead to inefficiency in the market. Subsidy causes overproduction whereas price ceiling leads to underproduction.
The graph above shows the inefficiency of price ceiling. When a price ceiling is imposed in the sugar market, it results in an inefficient underproduction. The marginal social benefit of sugar exceeds the marginal social cost and a deadweight loss lessens the consumer surplus and producer surplus. The rent ceiling is enforced below the equilibrium price, P1 and the quantity of sugar supplied, Q1 is lesser than efficient quantity, Q0. A deadweight loss occurs because the quantity of sugar supplied is less than the quantity demanded and it also shrinks the consumer surplus and producer surplus. The potential loss from searching for a close substitute is borne by the consumers whereas the full loss from the price ceiling is the total of deadweight loss and the increased cost of search.
In conclusion, both subsidy and price ceiling lead to inefficiency in the market. Subsidy causes overproduction whereas price ceiling leads to underproduction.
By Hoh May Yen
Hello,
ReplyDeleteThis above post is all about sugar and the analysis is quite good...I really like it...Keep posting dear.......
sugar suppliers