Petrol and Subsidy: Benefit or loss

  Before going any further from the article achieved from http://www.themalaysianinsider.com/malaysia/article/minister-ron95-petrol-subsidy-up-10-sen-pump-price-unchanged , let see how does the basic concept of demand and supply is. This graph below will give a clearer picture of the concept:

            The blue curve is representing the demand of a good in a society, and in this case, the demand of petroleum. The graph shows clearly the negative relationship of the demand curve between the quantity and price. It is logic, people would like to buy more when the price is lower as it will give the consumer a bigger benefit. The other curve, the red one is the supply curve. In contrast to the demand curve, the supply curve shows a positive relationship of supply between the price and quantity. As a supplier, the higher the price, the bigger the quantity that they are willing to sell. Why? Because it will definitely bring them a bigger return! However, the market doesn’t work in any way that will benefit only a certain party. Thus, the market equilibrium exists. Market equilibrium is where the demand curve crosses the supply curve. At an equilibrium point, both party are happy with the price and quantity of the good.

            Let us go back to the main point, the subsidy given by the government. Since many years ago, the government has given the subsidy on the petroleum price for the Malaysian. The intention of giving the subsidy is to lessen the burden of the Malaysian. So, how does the subsidy given by the government effect the market of petroleum? Subsidy on the petroleum will cause a fall in price and eventually shift the supply curve to the right.

As illustrated in the diagram above, the supply curve will shift to the right, from S1 to the new curve, S2. There are a few situations happen in result of the shifting of the supply curve. Firstly, price of the petroleum will decrease from the original price of P1 to a new price at P2. The subsidy itself is meant to reduce the people’s burden, so of course the price will decrease. Other than that, the increase in supply also happens. The supplier will definitely eager to produce more, as the subsidy will reduce their cost of production. From a supply at Q1, the new quantity will change to Q2.

Nonetheless, the effect of government giving the subsidies does not stop there. Subsidy will eventually increase the marginal social cost of the production without the supplier realize at the beginning. The decrease in price and decrease in cost at the beginning will make the supplier of be very much eager in supplying petroleum. At this point, the misallocation of resources will occur. The producer will start to use all the sources available to produce the product and the used of inefficient resources will occur. The used of these inefficient resources increase the marginal social cost the product. From the graph, the total amount of this increase of marginal social cost can be calculated from the area between P2, P3 and the demand curve. This rises in marginal cost can be seen as a social welfare loss. This cost can actually be used for a more productive purposes or reduce the government spending. Besides that, overproduction will also occur in this situation. This over production will definitely lead to wastage of production.

The subsidy given by the government is again to lessen the burden of the people. However, this subsidy seems to be very unfair as those people who earn a very big salary per month are also enjoying the money from the government. On top of that, the subsidy given by the government has attracted the vehicles from the neighbor country to come into Malaysia just to pump in petrol near the borderline of Malaysia and the neighbor country. In result, the government money that should be enjoyed by the Malaysian is being brought into the other country. As a cost to this situation, the authorities in Malaysia are forced to do a regular check out on the foreign vehicles in the country. They instead should have done a better job to ensure a better life of the Malaysian such as the prevention of drug addict and robbery. Time consumed to look after this foreign car in Malaysia has taken the time for the other major crime prevention.

Foreign cars pump in petrol RON95 in Malaysia even though it is clearly stated at the petrol station that  foreign cars is not allowed to do so.

Other than that, this subsidy given by the government is, yes, to lessen the society’s burden. But how fair and how efficient has this noble deed contribute to the society? The subsidy is given to all the Malaysian, which mean people from level of income enjoy it. It seems to be unfair that those people who drive Lamborghini, BMW, Mercedes and Ferrari also enjoy the same subsidy as those who drive saga, kancil or myvi. If the government actually really wants to help the needy, they can use the money used to pay for the subsidy to directly help them, with referring to their income level and a thoroughly checked family background. The money can also be used to improve the public affair such as increasing the public hospital. For the rich people, if they can afford to pay for private hospital that is way much expensive than the public hospital, why should they enjoy the subsidy, which is a t the first place to help the poor!

As from the article too, we know that the global price of petrol has gone up but the government has made us to pay the same price. What does this has supposed to mean? The government is paying even more money for the subsidy! The government really should stop paying out a lot of money for this and instead spend them on the social needs such as better education and electricity in the remote area.

Apart from that, as we concern today, the mother nature is suffering from the excessive pollution and in which, the carbon monoxide gas from the vehicles is one of the major factor. More and more people can afford to drive their own car and making the public transport not an option. If the government does not impose subsidy on petrol, the price will be very high that is pretty sure to change people’s option. More people will opt for public transportation than driving own car, which will definitely decrease their spending. And in this case too, the money that the government pays for the subsidies can be used to make lots of improvement to our current condition of public transportation. This will not only help to preserve the nature by decreasing the pollution, but also help the society as a whole.