2 Indirect taxes

Indirect taxes

Indirect taxes are taxes that raise the price of a good so consumers essentially paying the tax during purchasing the goods; which mean paying more for the product. This main cause why consumers thought of as taxes that are passed on, as the price of the tax is salaried for by increasing the overall price of the goods or service. Fuel, alcohol and cigarettes taxes are all considered examples of indirect taxes, many have disagree that the tax is actually paid by the end consumer in a way of a higher retail price. An inefficient marketplace and alter market prices that doesn't match their equilibrium,

What happen if the government ignores the price floor?

For government, the price floor is useful so that government can use as the medium to prevent consumer from buying certain goods; alcohol and cigarettes. Then government can occur on the market and set the minimum price on the goods to be sold at or above. By doing this, suppliers are forced to increase prices of their goods and as a result the quantity demanded decrease. To be effective, the price floor should be set above the market equilibrium. In another hand, from time to time there is an illegal market can be extend where the goods is sold at the original market price. For example, in other country; United Kingdom it is not infrequent to find small dealers that illegally import large stocks of cigarettes and sell them for about half the price of cigarettes that can be bought in shops. This can repeatedly make a political party not been accepted with the large powerful firms and this can affect their future political success especially in US.

Why does government apply tax on alcohol and cigarettes?
Government applies tax on alcohol and cigarettes to increases the government revenue as elasticity for these items is inelastic. Since most of the people are habitual alcoholics and smokers and when they are addicted to these things, they are willing to pay a hefty    price just to get it.

The imposition of either type of indirect tax has an effect similar to a rise in production costs. This means that a firm's supply curve will shift up vertically by the amount of the tax. This can be shown in the graph below by a unit tax that will shift the supply curve by the full amount of the tax, so the new curve is parallel to the original .

Does the price elasticity of demand effected?

In majority cases, the burden is split between producers and consumers are worse off.  With indirect tax, suppliers or producers may be able to pass on some or all the indirect taxes onto consumer through higher prices. The tax and the ability of businesses depends on the price elasticity of demand supply carries that is known as shifting the burden. In the diagram shows that the rate on the consumer is indicated by the price rise, P to P1, and times the new quantity sold, 0 to Q1.The vertical distance is the tax per unit which is greater than the price rise , therefore the rate on the producer is measured as the distance P to X, times 0 to Q1;the green shaded area. The exact division depends upon how consumer react to price rise which is their price elasticity of demand.

The differences when demand is price elastic or inelastic

 The conclusion that can be made is the government should impose taxes on cigarettes and alcohol as it will generate high revenue and also help the habitual smokers and alcoholics to help cut down their bad habit. 

References:

http://www.economicsonline.co.uk/Competitive_markets/Indirect_taxes_and_subsidies.html

http://biz.thestar.com.my/news/story.asp?file=/2010/9/28/business/7112158&sec=business

http://www.adamsmith.org/news/press-releases/taxes-on-alcohol-and-cigarettes-don%E2%80%99t-discourage-consumption-and-hit-the-poor

http://www.tutor2u.net/economics/revision-notes/as-marketfailure-indirect-taxation.html



3 Increase in the Prices Of Eggs In Malaysia

In October 26, 2012, there was an issue on the increases on the price of eggs in Malaysia. Based on the article from The Star, the egg producers will gain from higher price of egg because the price of egg was set lower than the production cost. Price of eggs increase will benefit the producers however what is the impact to the biggest consumer of eggs such as the restaurateurs and bakers? What are the causes of the price egg to increase to 2 cents?

 Based on my analysis, those major consumers are not impacted on the price increase as they are willing to absorve the cost at the moment. However, it the situation  continue for  a few months, there is possiblity that they will pass on the cost to the end consumers. The question now what cause the price of egg to increase?



Drought of corn in the US

The cause of egg price to increase is due to the increase of price of corn which is imported from the United Staes. Based on Federation of Livestock Farmers' Associations of Malaysia advisor, Datuk Fong Kok Yong point of view, high prices of corn and soybean was due to the drought in the United States recenly.  

To illustrate the situation, the diagram below indicate the increase in price due to shortage of supply while the demand remain the same. The previous price of egg was 29.0 cents per egg (P1) and currently the price of egg is 31.0 per egg (P2). The price change from (P1) to (P2) with quantity demanded remain the same (Q1&2) and the supply curve will shift leftward. This occurs due to shortage of supply. 

Major Consumer

Even though there is an increase on the price, the quantity demanded remains the same for the time being as the major consumers are willing to absorb the cost due to minimal impact on the overall production costs. This situation will change if the producers are unable to sustain their production cost anymore.

In conclusion, there is no sudden impact on the increase of the price but if it prolong, there is possibility the end consumers will feel the heat in the price of the food. If that happens, there could be changes in quantity demanded and the egg producers may have to find other alternatives for imported supplies for the chicken.



References:

http://www.fas.org/sgp/crs/misc/RL34580.pdf
http://www.flfam.org.my/
http://www.malaysiandigest.com/news/36-local2/147572-egg-price-increase-eateries-and-bakers-willing-to-absorb-costs.html
http://biz.thestar.com.my/news/story.asp?file=/2012/10/26/business/12230104&sec=business
http://thestar.com.my/news/story.asp?file=/2012/10/25/nation/12216733&sec=nation
http://thestar.com.my/news/story.asp?file=/2012/10/25/nation/12216057&sec=nation

3 Malaysia’s GDP

The growth rate of the GDP can determine the economic health of a country. Malaysia a middle-income country that has been developing its economy; from being a producer of raw materials they have emerged as a multi-sector economy. The Government of Malaysia is continuing efforts to boost domestic demand to wean the economy off of its dependence on exports. Nevertheless, exports - particularly of electronics - remain a significant driver of the economics.

Based on the graph about Malaysia’s GDP growth rate, we can say Malaysia’s GDP growth rate is relatively average compared to other foreign countries. We can also see that in 2009, Malaysia had the highest and lowest GDP growth rate. In early of 2009, Malaysia has undergone the lowest growth rate of -7.6, but Malaysia regained its bearings and managed to get the highest GDP growth rate of 5.9 at the end of the same year. 

Malaysia reported a Government Budget deficit equal to 5.30 percent of the country's Gross Domestic Product in 2011. Historically, from 1988 until 2011, Malaysia Government Budget averaged -2.89 Percent of GDP reaching an all time high of 2.40 Percent of GDP in December of 1997 and a record low of -7.40 Percent of GDP in December of 2009. Government Budget is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments). A budget deficit occurs when an government spends more money than it takes in. The opposite of a budget deficit is a budget surplus.


So in order to overcome the budget deficit, the government should implement the contractionary fiscal policy where government spending decreases and the tax rates increases. But because the global economy is weak, the government can't cut down on spending in order to support the country's economy but instead they should have spent it with limits. 

So now, with Budget 2013, the government will reduce the budget deficit and extend spending on welfare and infrastructure projects to bolster domestic demand, the Ministry of Finance said as the country’s next general election nears. They will be extending reinvestment allowance and reducing income and corporate tax which is given to encourage companies to reinvest for the purposes of expansion, automation, modernisation or diversification of their existing businesses into any related products in the same industry.

Another way is by the Monetary Policy. Monetary policy is defined as the Central Bank using some instruments to influence the economy through the money supply and interest rates. Through this policy, with the unemployment rate and recession increasing in 2009, Bank Negara Malaysia might have influenced the GDP by decreasing the interest rates. With interest rates dropping, aggregate expenditure on investment and interest-sensitive consumption goods increases causing real GDP to grow.

But how do they decrease the interest rates? 

1. By buying bonds. When the government buy bonds it increases the size of bank deposit, meaning money supply increases. Because money supply is high, interest rates will eventually fall and this increases purchasing power.
2. By decreasing the reserve requirement ratio. Required reserve ratio is the percentage deposits that the central bank requires a bank to hold in vault or on deposit. It  influences how much money the banking system can create with each dollar reserve. By decreasing the ratio, it will increase the money supply of the bank and lower interest rates.
3. By lowering discount rates. Discount rates refers to the interest rate on the loan that the Central Bank makes to banks. When the rates decreases, the interest rates on loans decreases as well. Thus, more people are able to apply for loans and the purchasing power will rise. 

Monetary Policy

The Prime Minister also came up with Budget 2013 whereby Budget 2013 has allocated RM 251.6 billion for the implementation of development projects with the focus on the well-being of the people. 

The government came up with the programme "My First Home Scheme" whereby young married couples will be able to apply for a joint loan that is set at  RM 10, 000 per month. People could now get housing loans from banks with much ease compared to before.

The government has also reduced individual income tax by 1% for changeable income for those earning RM 2, 500 and RM 50, 000. The next step that the government will take is introduce "Government Service Tax" which could help the government ease the country's debt and will not burden all Malaysians as lower income group are not required to pay it. 

Through Budget 2013, government will invest to satisfy individual or collective needs of the members of the community and also develop the country's economic and performance for the reason of increasing GDP growth. 

The Economic Transformation Programme

The Economic Transformation Program is an initiative by the Malaysian government to turn Malaysia into a high income economy by the year of 2020. This program is to aim Malaysia towards achieving an annual GDP growth of 6% until 2020 to meet its target of becoming a high-income nation. Datuk Seri Najib Tun Razak said such a rate of growth was needed for Malaysia to raise its per capita income from the current US$7,000 to at least US$17,000 by 2020 to qualify as a high-income nation under World Bank classifications.

Based on statistics, 6% annual growth is not easy to achieve and what more for a country with an economy that is more dependent on external trade than domestic consumption and recent global crisis saw manufacturing activity fall dramatically and that affected both employment and growth rate. 

Policy reform is required to get private sector investments in, especially with the number of competing nations for investment money growing from the days when Malaysia used to be a huge recipient of foreign direct investment.

It was also mentioned by RAM Holdings Group Chief economist Yeah Kim Leng, that the productivity growth rates have to increase from 1% to 1.5% yearly in order to maintain investment to GDP rates at 30%.

(loyaburok.com)

All in all, Malaysia's GDP is growing but at a slow rate and with the target to reach 6% annual growth, will we be able to achieve it or not, who knows. We'll just have to wait and see how our country will progress for the coming more years. 

Reference:

http://biz.thestar.com.my/news/story.asp?file=/2009/11/10/business/5077262&sec=business

http://biz.thestar.com.my/news/story.asp?file=/2009/11/9/business/20091109113647&sec=business

http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

http://www.freemalaysiatoday.com/category/nation/2012/09/28/ensuring-economic-growth-continues/

http://www.tradingeconomics.com/malaysia/government-bond-yield

http://thestar.com.my/budget/

http://www.tradingeconomics.com/malaysia/government-spending

http://en.wikipedia.org/wiki/Economic_Transformation_Programme

3 Subsidies on petrol

The Cost of Petrol Subsidies

       Subsidy is the donation of funds for certain purposes. If the allocated money was spent on something else, payment must be returned. The subsidy may be released under the equity financing. Intensive development of energy, industry and transport inevitably causes an increase in fuel consumption. Subsidies for oil continue to grow. But worldwide reducing subsidies can be benefit to protect the environment and provide the necessary   fiscal space.

      

        Subsidy on petroleum products has increased over the past few years. In 2003, the global volume of subsidies to consumers of oil products reached nearly 60 billion U.S. dollars. By mid-2008, they have increased more than eight-fold to 520 billion U.S. dollars. With the rapid growth of international fuel prices during this period, many governments have chosen not to fully reflect this increase in domestic retail prices, which led to an increase in subsidies. Although the second half of 2008, subsidies were sharply reduced as a result of lower oil prices, they again grew throughout 2009, as oil prices have played a fall, and by the end of 2010, subsidies reached nearly 250 billion U.S. dollars. However, the true sizes of the subsidy of the economy even more. 

       In principle, the price of oil should include taxes, both to meet the needs of the state in income, and to repair damage to the environment on a national and global scale. If taxes are too low, it creates a "tax subsidy" for consumers. Based on the reference level of tax U.S. $ 0.30, with a particular view of these considerations, it is projected that by the end of 2012, the global amount of subsidies to consumers to reach 740 billion U.S. dollars, equivalent to 1 percentage of the global gross domestic product (GDP).

Who subsidizes?

        All pre-tax subsidies granted in emerging market and developing countries, but developed economies account for a large share of the volume of subsidies including tax. Of the total pre-tax subsidies, is 250 billion dollars to the share of emerging markets account for 65 percentage, while the share of developing countries - the other 35 percentage. A tax included in the $ 740 billion subsidies emerging markets account for 57 percentage, 20 percentage in developing countries, while the remaining 23 per cent of the country with a developed economy.

How does subsidization help a country?

            Many countries, provides support from the budget to mitigate the effects of the global economic crisis, are now experiencing the growth of budget deficit.

Halving subsidies including tax would reduce the average projected budget deficit in the country providing subsidies by 1 percentage of GDP. In addition, establishing the limit subsidies could bring significant benefits to the environment: reducing subsidies by half could reduce emissions of greenhouse gases by about 10 percentage in 2050. However, the removal of subsidies, even at their low targeting, can seriously degrade the poor households. Real alternative would be transfers, addressed to needs. For example, countries could eliminate subsidies on gasoline, while maintaining subsidies for kerosene, which is essential for the budgets of poor households. Also part of the budget savings from reducing subsidies could be spent on existing programs, more help to the poor, including food for schoolchildren, school fees and medical services and cash transfers. Improving the structure of social protection programs over time can reduce the need to subsidize fuel. Information campaigns for the public needs to be emphasized that fuel subsidies are inefficient, contrary to social justice and low-cost. 

 
Reference: 

http://www.imf.org/external/pubs/ft/spn/2010/spn1005.pdf

4 The Monopolization of Astro.

Is Astro still monopolizing the Pay TV industry?

Astro is the only satellite TV service in Malaysia. This makes Astro a monopoly as it is the only firm that provides satellite TV service in Malaysia and so it is the only firm in the industry.

Due to high barriers of entry, many new firms are discouraged to enter the industry. This is because Astro has made such a big name for themselves and has built strong brand recognition and brand loyalty to the point where the first thing that comes to Malaysian customer's mind when satellite TV is mentioned would be Astro. Without Astro, Malaysian citizens would not be able to watch certain shows and news as Astro provides channels that broadcast shows from around the world, from news to sports to entertainment. 

Besides so, with such advanced technology and features that Astro provides, new firms will feel challenged and it would be difficult for them to beat or even keep up to the level of service Astro for they have been in the industry for a long while. And so with that, they are very specialized with their field with their experience and are able to manage services, finance and marketing and thus providing good service to customers and increasing efficiency.

Other than that, Astro has large satellites such as the MEASAT satellites that are too large to be owned by a small producer or service provider. That is why there is no other satellite TV service provider but Astro.  

Due to Astro's monopolization of the Pay TV market, they are able to make supernormal profits as no other firms are competing away the profits that are being earned. This situation is showed in the diagram below. The blue shaded region shows the supernormal profits earned by Astro. This situation could continue to stay this way without the entry of new firms.

Unfortunately, there are cable TV networks rising in hopes to compete with Astro. They are not satellite-based transmitted but they are offering almost the same services that Astro offers; entertainment and television shows. This will change the market structure for Pay TV from monopoly to oligopoly. 

Oligopoly is where there are a few firms dominate the industry. The industry have quite a few firms but not very many and are offering homogenous or differentiated products.  In this case, the Pay TV market is of a few firms such as Astro, ABN and HyppTV offering differentiated product and services such as the TV channels offered, the way shows are being broadcasted (Satellite/Cable/IPTV), branding and etc. 

For example, ABN (Asian Broadcasting Network) is set to launch its services soon with features that are rumored to be better than Astro. For instance, ABN is offering more than 2000 channels and for a cheaper price than Astro. 

Since ABN has not launched its services yet,  Astro's other competitor would be HyppTv by TM Net. HyppTv is a new Pay TV service who started their services in 2004 which offers about 94 channels whereas Astro offers 156 TV channels.

Due to the existence of the new HyppTV in the Pay TV industry, the firm would take demand from Astro and thus Astro’s demand curve will shift to the left.  The demand for Astro will only decrease slightly as it is the dominant firm of the oligopoly, acting as a monopoly as it is the largest firm in the market. This is because Astro provides better service and is more well -known than HyppTV. 

This is showed in more detail in the diagram on the right.

Instead of a bigger margin of supernormal profit as shown in the blue area, Astro’s profit has decreased due to the existence of the new firm as shown in the purple area but it is still earning profits as it is still the largest firm in the industry.

Will Astro continue to become the largest firm in the industry and the dominant firm of the oligopoly market? 

As of now, Astro is leading the market with 3.1 million subscribers nationwide, which is more than 50% of the potential market in the peninsula. HyppTV is said that it has over 420,000 subscribers, slowly increasing over time. 

As you can see, Astro is still dominating the Pay TV market and is holding its spot as the dominant firm of the now oligopoly market. But as HyppTV is slowly rising up and threatening Astro's market, Astro has to start making strategies in order to secure its top spot. For example, Astro's recent partnership with Maxis to come up with a bigger and better IPTV (Internet Protocol Television) than HyppTv could help Astro to grow and increase its market volume and challenge HyppTV in the IPTV market.    

All in all, the Pay TV industry and the competition among firms is very interesting as the competitors rise up to compete with the existing firm. So far, the existing firm is still winning.. But we shall see ;)

Reference:
http://themalaysianreserve.com/main/index.php?option=com_content&view=article&id=2043:who-loses-in-astro-maxis-partnership&catid=36:corporate-malaysia&Itemid=120
http://www.astro.com.my/
http://www.hypp.tv/
http://en.wikipedia.org/wiki/Hypp.TV
http://en.wikipedia.org/wiki/Astro_%28Malaysian_satellite_television%29
http://biz.thestar.com.my/news/story.asp?file=/2012/2/18/business/10754896&sec=business
http://biz.thestar.com.my/news/story.asp?file=/2012/10/17/business/12182562&sec=business
http://mynewshub.my/2011/06/30/astro-does-not-understand-peoples-burden/
http://www.skmm.gov.my/commons/viewdetail.aspx?docid=432