The Increase in Subsidies and The Price Cap of The Food Price

Taxes and subsidies. Taxes are something that can increase the price paid by the buyers and lower the prices received by the sellers. So when the taxes decrease the quantity produced, it leads to underproduction. Taxes can be incidence with the elastisity if the demand and the supply when the division between buyers and sellers depends on the elasticities of demand and supply.

Subsidies are a payment that the government give to the producer which can decrease the prices paid by buyers and increase the prices received by the sellers. Subsidies can lead to overproduction when they increase the quantity produced.

Externalities. An externality is a cost or a benefir that effects someone other than the seller or buyer. It can become overproduction when the external cost arises and it become underproductionwhen the external benefit arises.

A public good is a good or service that is consume simultaneously by everyobe even if they do not pay for it. A market would be underproduce national defense because it is in each person’s interest to free ride on everyone else and avoid paying for the good that has been shared. A common resource is owned by no one buy it is available to used by everyone. It can be overused when in everyone’s self interest to ignore the costs they impose on others when they decide how much common the resources to use.

Monopoly become one of the obtacles because it is a firm that provides a good or service. It becomes underproduction when a monopoly produces too little and charges too high to achive its goals.

A price ceiling is a charge that the government give to the producer to make the price higher from the specified level. When a price ceiling is set above the equilibrium it has no effect and the market works in efficient way. But when the price ceiling is set below the equilibrium, it has a powerful effect. A price ceiling can cause a black market where is an illegal market that operatees alongside a legal market in which a price ceiling or other restriction has been imposed.

According to Fintan Ng that local prices are expected to remain stable in August even as food prices soared abroad in the wake of a severe draught hitting parts of the United States and Europe alongside rising energy prices that can make subsidies and price caps continued to mask inflationary pressure in the country, which had experienced a drop in its consumer price index (CPI) since the beginning of the year and they also expected Bank Negara to keep the key policy rate at 3% for the rest of the year as concerns over growth outweighed inflation expectations.

The food price increase because of the occurrence of inflation and the amount of money in circulation. The occurrence of inflation in which is increase or rise in the price of goods or services in a given period. Usually this happens during the period with respect to the moment or event such as Hari Raya and Christmas.

For the amount of money in circulation, this is because the earlier consumptive of the citizen that makes them withdraw their funds that already been deposited for a long time. And with those funds held over sometime makes people "confused" to use it. Because it is simultaneously make a certain item for the shoppers to assault it. Consequently, according to the economic laws, as more and more requests then the price will rise. If a stock available, it will rise under control and at a reasonable range, if it is not then the price will increase dramatically even sometimes it will become effects in the social events.

When the food price is perfectly inelastic demand, the buyers pay the entire tax such as the service tax in the restaurants and when it is perfectly elastic demand, the sellers pay the entire tax. The more inelastic the demand, the larger is the buyer’s share of the tax. But if there is no tax, the marginal cost of the food is equal to the marginal social cost and that makes the market become efficient but not for the production subsidies because at the quantity of food produced, the marginal social benefit is equal to the market price which has fallen so the production subsidies become inefficient and overproduction.

If the marginal social benefit of the food is exceed the marginal social cost, so the tax is inefficient because the tax revenue takes part in the total surplus and the quantity of the food become decreased. So the marginal social benefit of the food has increased or exceeded that make the production subsidies become inefficient and over production. The production subsidies are overproduction in the two situations above that make a market failure to the food, and the price also increase higher than the original price before the subsidies happen to them and the price expectations of inflation will also become a concern for the rest of the year.

Original article link: http://biz.thestar.com.my/news/story.asp?file=/2012/9/18/business/12040573&sec=business

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