A government subsidy is money paid by the government in order to keep prices lower than their expected market value. A government subsidy is typically used to keep an industry from going out of business or to encourage economic activities that would not occur otherwise. Subsidies frequently result in a form of protectionism that results in less import and more exports in the industry, which is receiving the subsidy. In addition, there are also government subsidies meant to help individuals and families in the form of housing subsidies. A subsidy is a direct payment to a company to facilitate local investment. It can take the form of development grants, job training, free land or free utilities for a specified period of time. Tax breaks are also used to keep firms from relocating, including tax credits, rebates and deferments. Many major industries such as aerospace, finance, retail and electronics have received government money either directly or indirectly. (Johnson, 2013)
Discuss advantages and disadvantages of a system of subsidies from the point of view of farmer.
Advantages
The forms of subsidies to farmers are differing by country and commodity. The main forms of subsidy include direct payment to farmers, price support by government, regulations to set the minimum prices, export subsidies, and also import barriers with quotas, tariffs, or regulations. In addition, some government of wealthy country will provide help for agricultural research and development.
In the system of subsidies, there were exists some advantages and also some disadvantages, therefore, some people maybe will support it, and some people maybe will opposition to it.
The advantages of a system of subsidies from the point of view of farmer such as export subsidies and wages and capital subsidies. Export subsidies, Subsidies for industries are typically meant to encourage the export of a type of a good while simultaneously decreasing the imports. While this can be accomplished through tariffs (which are taxes on the imports), a subsidy allows for the same effect, namely domestic economic growth. One industry that commonly receives government subsidies is the agriculture industry, because of concerns that a country's food supply should be self-sufficient. Government subsidies for farmers can either take the form of capital (in order to ensure that they have the necessary money to invest in their farms) or by buying excessive crops after warehouses are filled. In the United States, the Export Enhancement Program oversees farm subsidies. (Lichtenstein, 2012)
The second advantage is wages and capital subsidies; government subsidies can also take a less direct approach than that of the agriculture industry. In the case of many wage and capital subsidies, the government encourages industry through a reduction of taxation on either certain products necessary for an industry or by decreasing taxes associated with the hiring of new labor. Subsidies of this type typically take the form of a tax credit for a specific industry. Thus, while it may not have the same appearance as directly giving money and buying products (as is common with agriculture), subsidies of wage and capital still have the same effect, namely, to boost a specific industry with additional funds (in this case, in the form of less taxes). (Lichtenstein, 2012)
Disadvantages
In United States this year's expiration of federal agriculture policies gives Congress an important opportunity to take a fresh look at the $25 billion spent annually on farm subsidies. Current farm policies are so poorly designed that they actually worsen the conditions they claim to solve. For example:
Farm subsidies are intended to alleviate farmer poverty, but the majority of subsidies go to commercial farms with average incomes of $200,000 and net worth of nearly $2 million.
Farm subsidies are intended to raise farmer incomes by remedying low crop prices. Instead, they promote overproduction and therefore lower prices further.
Farm subsidies are intended to help struggling family farmers. Instead, they harm them by excluding them from most subsidies, financing the consolidation of family farms, and raising land values to levels that prevent young people from entering farming.
Farm subsidies are intended to be consumer-friendly and taxpayer-friendly. Instead, they cost Americans billions each year in higher taxes and higher food costs.
Lawmakers would be hard-pressed to enact a set of policies that are more destructive to farmers, taxpayers, and consumers than the current farm policies. For these and other reasons, organizations representing taxpayers, consumers, environmentalists, international trade, Third World countries, and even farmers themselves have united around the shared conclusion that the current farm subsidy system is failing and in dire need of reform during this year's reauthorization.
Discuss advantages and disadvantages of a system of subsidies from the point of view of consumer.
Advantages
The international market based on supply and demand determines the prices of oil and petroleum products. These are factors beyond our control. OPEC also plays an important role in setting oil production levels, which in turn, affect the market price. Although Malaysia produces and exports oil, we are not a member of OPEC, nor are we a major oil producing country. As such we have no influence on how the price of oil is determined in the international market. If there is a large increase in oil prices on the world market, it affects the price of petroleum products such as diesel, petrol and cooking gas (LPG) in our country.
By comparison, fuel in Malaysia is much cheaper than most ASEAN countries. In fact, our prices are among the lowest in the world.
1. (Economic Planning Unit, Prime Ministers Department, 2005)
Due to the much lower prices of diesel in Malaysia compared to Thailand and Singapore, there is a big incentive for Thais and Singaporeans to buy petrol and diesel in our country. The Government ensures a low price of petrol, diesel and cooking gas in Malaysia by exempting sales tax on diesel and petrol and providing subsidies for all products. With the combination of subsidies and taxes forgone, the public can enjoy more affordable public transport. Subsidies also lower operating costs for fishermen and operators of river transportation in Sabah and Sarawak.
The advantages of a system of subsidies for consumer such as housing subsidies, lower inflation rate and, poor standard of living. For housing subsidies, the government also can indirectly subsidize an individual or family's purchases, as is commonly seen in the case of housing subsidies which allow for cheaper houses to be built. The common example of this in the United States is "Section 8" housing, which is housing subsidized by the government that is meant to be affordable for lower-income families. By reducing the cost of a home, the government ensures that more families are in homes. This allows individuals to have more stability in their attempts to find work and also provides more disposable income for poorer families. 2. (Lichtenstein, 2012)
However, the second advantage is lower inflation rate. Indeed, reducing the oil price subsidy will result in an increase in the oil price that leads to a higher inflation rate. Based on the data provided by the government agencies and the announcement made by the Domestic Trade and Consumer Affair Minister; the inflation rate was 7.7 % for June, 8.4 % for July and 8.5 % for August. The big jump in the inflation rate was the highest for the last 27 years and this was unpredictable.
There are many evidences that support the reason behind the drastic increase in the inflation rate. First, producers, manufacturers, traders, and business sectors shifted the high production cost to the consumers. Second, the world's economic activities are oil-induced activities. The last evidence is that historically oil has been the best source of energy for more than a century. In theory, this is known as cost-push inflation. Now let's look at the first evidence, when an industry's cost of production increases either due to taxes, input prices or operation cost; the producers will transfer the burden to the consumers by increasing the price for goods and services. 3. (Ahmadfathi83, 2008)
The third advantage is poor standard of living. In Malaysia, once the government announced the reduction in oil price subsidy it hints towards a poorer standard of living in future, as the oil price increases. The economist has identified few evidences that support the rationale behind this assumption. First, rising in almost all food prices, transportation costs and other essential cost for human life given their fixed income will produce unfavourable conditions for the people. Second, some might be unlucky either to be retrenched or hardly get employment in the market. The economist has identified few evidences that support the rationale behind this assumption. First, rising in almost all food prices, transportation costs and other essential cost for human life given their fixed income will produce unfavorable conditions for the people. Second, some might be unlucky either to be retrenched or hardly get employment in the market. 4. (Easterly & Fischer, 2001) "Our evidence support the view that inflation is regarded as more of problem by the poor than it is by non-poor, and that inflation appears to reduce the relative income of the poor. It thus adds to a growing body that on balance, but not unanimously end to support the view that inflation is a cruel tax," (p. 161).
Disadvantages
There are two disadvantages of a system of subsidies from point of view of consumer such as highly inefficient and relatively inequitable.
SUBSIDIES ARE HIGHLY INEFFICIENT
For the economists reading this, the term deadweight loss will probably come straight to mind. To illustrate this point, consider the following example. In Scenario 1, we have 2 goods, apples and oranges. Apples are subsidized, from a market price of RM2 to RM1.50 (i.e. a 50 cent subsidy) while oranges are not (priced at RM2). Say you have an income of RM10 - you would aim to purchase the affordable combination of the two goods, which gives you the highest level of satisfaction (or utility, in economic terms); in this instance, let us say that is 4 apples and 2 oranges. Here, the subsidy costs the government RM0.50*4 apples = RM2.
In Scenario 2, let us say the government removes the subsidy and gave you RM2 directly instead. Notice that you can still afford what was your favorites combination earlier, i.e. 4 apples and 2 oranges (which costs RM12). Since you can still get your favorite combination under Scenario 1 (i.e. 4 apples, 2 oranges), you cannot be any worse off under Scenario 2. Additionally, given that your income and relative prices have changed here, you can now also choose a different bundle of goods that can leave you better off (i.e. give you a higher level of satisfaction than from purchasing 4 apples, 2 oranges).
Essentially, this method is what economists call revealed preference. What it states is that replacing the subsidies with lump-sum transfers that do not distort relative prices and choices between goods will lead to a greater welfare improvement for a given cost to the government purse*. The only caveat to this efficiency argument is in the case of a positive externality, whereby the consumption/production of the good has positive effects to third parties not directly involved and we may want to encourage more consumption/production but it is hard to justify most subsidies in the country with this argument. An example of this would be education, which has benefits to society beyond what you receive individually. A subsidy on education might thus be justified. (Dhruva, 2011)
SUBSIDIES ARE RELATIVELY INEQUITABLE
The second strand of my argument is that subsidies are inequitable compared to various alternatives we might have. Consider fuel subsidies. The direct benefit to the average consumer depends on whether or not they have a vehicle, and the extent to which they use it. Clearly then, the richest 5% of the population are likely to benefit far more than the poorest 5% (who are unlikely to have a fuel-powered vehicle) from a fuel subsidy. The common justification used usually applies to subsidies on necessities; this is because as a fraction of their smaller budget, the poor would benefit more from these subsidies than the rich, making it a more equitable subsidy even if in monetary terms this is not as clear.
Nevertheless, I would argue that direct monetary handouts to the poor can be more equitable than the aforementioned subsidies. With direct monetary handouts, we can ensure the overall monetary benefit of the policy benefits the poor disproportionately in both absolute and relative terms. Recent examples would include the one-off RM500 payment to households earning below RM3000. Of course, if these benefits are intended to be continued annually, they should not be removed lump-sum at a boundary like this because it can create incentive problems, e.g. for people earning just above RM3000, there is an incentive to work less in order to go below the RM3000 boundary and obtain the extra RM500.
A better way is likely to have the benefits slowly taper off as someone earns more, which reduces the distortionary effect of people suddenly losing their benefits. Nevertheless, spending money in this way is far more equitable (it is targeted specifically at the poor) than a blanket subsidy that benefits everyone in society. (Dhruva, 2011)
