Sep 29 2009

Letting markets work: the Malaysia fuel subsidy goes bye bye

This article was originally published on June 9, 2008

Asia Sentinel – Malaysia cuts fuel subsidy

One of the recurring themes of this blog is the conflict between good politics and good economics. Most of the time in government, smart economic policy is sacrificed in order to achieve political favor with voters. Whether it’s price ceilings on petrol in China, Zimbabwe’s slashing of food prices, harmful import restrictions to benefit domestic producers, or the proposed suspension of gas taxes in a time when fuel conservation is really what’s needed, politicians often act in economically stupid ways to bolster or hang on to their popularity.

So when a government makes a bold move that is economically sound, it sometimes comes as a surprise, as in the case of the Malaysian government this week. The government in Kuala Lumpur has for years subsidized domestic fuel prices, which at under 2 Malaysian Ringit per liter have been the equivelant of roughly $2.40 US per gallon, far below the average price in the west. Drivers benefited from this subsidy, but were not forced to bear any of the burden of rising oil prices, nor had they any incentive to conserve or switch to more fuel efficient automobiles or alternative forms of transportation. The Malaysian government, on the other hand, has had to allocate more and more of its limited budget towards subsidizing petrol prices.

Well, as of yesterday, all price supports for petrol are cancelled, and the effect will be sweeping in the Malaysian economy:

The government announced Wednesday evening that petrol prices would rise by 78 sen (US24¢) at midnight — a 41 percent jump from RM1.92 per liter to RM2.70. That means those spending RM2,000 per month to fill the tanks of their BMWs will now be paying RM2,820. Regardless of income levels, it is likely most Malaysians will feel the pinch.

The subsidy would have cost the Malaysian government 56 billion ringit (around $17 billion) this year. With the money it will now save by ending the subsidy, the government will begin making public transport cheaper and more convenient for commuters who wish to avoid paying for the more expensive petrol to fuel their personal automobiles:

The government hopes to channel the savings into improving public transportation, as it promised many years and elections ago but with little to show. In Kuala Lumpur, despite having a light rail train service and monorail, public transportation is expensive and inconvenient. Worse, intercity travel is still being serviced by old and slow trains, and accident-prone buses.

Malaysia is not the only country taking measures to end government fuel-price supports:

Indonesia has hiked fuel prices by an average of 29 percent, saving about 34.5 trillion rupiah and kicking off a series of street demonstrations… Similarly, after slashing subsidies, Taiwan will distribute US$659 million to middle and low-income families. The latest to raise oil prices is India, whose government announced Wednesday that gasoline and diesel prices will increase by 10 percent.

As more and more countries allow the market mechanism to work, and in the short-run fuel prices rise with the price of oil, the chances are that the long-run equilibrium price of petrol will actually begin to fall.Price controls and subsidies distort market demand. In Malaysia, where a government subsidy kept the price consumers paid around 2 RM, the quantity demanded exceeded the free market quantity. With the removal of the subsidy, consumers will respond by driving less, reducing overall quantity demanded for petrol. As other Asian nations follow suit, global quantity demanded for petrol will decline, while higher prices incentivize producers to increase output. New prouction facilities will come online, just as drivers begin to find alternative ways to get to work, either through carpooling, public transportation, cycling or walking.

The combined effect of slowing increases in demand (or perhaps even a decline in demand if enough substitution of alternative forms of transportation takes place), and increases in supply as new production facilities come on line will be a stabilization and eventual fall in the price of oil.

The future fall in oil prices is explained in more detail here. Malaysia’s repealing of the fuel subsidy is one example of how markets work to restore equilibrium in a market such as that for oil today, where short-term bubbles always burst. $135 oil is probably not here to stay, if only the market is allowed to works its magic.

Discussion Questions:

  1. Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?
  2. Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.
  3. How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

41 responses so far

41 Responses to “Letting markets work: the Malaysia fuel subsidy goes bye bye”

  1. ckon 10 Jun 2008 at 3:59 pm

    Petrol price had gone up. Everyone knows it. So many desperate fellows actually drove their cars bumper to bumper queuing in lines just to get their tanks filled last night hoping to save some money before the super price hike. I am no MBA or economist, so I am in no position to fully understand the fuel subsidy thing and their effect on the economy and blah blah blah. But as a normal citizen who has an almost properly functioning brain, I can tell you that the currently planned method of cash rebate is a piece of shit that could only come from someone with shits in their heads.

    Reasoning:

    1) How many cars are over 2000cc?? Few or may be very few only. Meaning that many (rich or poor), will still benefit from the cash rebate irrespective of their gas using habit. This is not what we want. We want the poor to receive more.

    2) Let say I am a businessman who runs a car rental service and I own 50 cars for rental. I rent the car to customers and customers fill and pay for the petrol themselves, so essentially I will receive $31,250.00 ($625.00 x 50) annual cash rebate for doing nothing, extra profit from the stupid policy maker and government.

    3) Let say I am a filthy rich man and I own 5 luxury cars but all are below 2000cc, or may be I am just a rich man who likes to own nice cars, then I will be entitled $3,125.00 ($625.00 x 5) annual cash rebate despite being filthy rich with overspending lifestyle while my fellow poor neighbor who owns a Honda 70cc kap-cai only receive $150 annual cash rebate despite being poor and living a thrifty lifestyle!!! VERY STUPID GOVERNMENT!!!

    4) Let say I am a poor man who don't own any cars/motorbike and I rely on public transportation to go to/from work, then I will not get anything sumore I am likely to pay more for transportation fares due to the diesel hike, despite me being very poor not even capable of owning a motorbike, being nice for using public transportation thus relieving road congestion, being environmental friendly by not burning fossil fuels, but in return I get punished!!!! DAMN STUPID GOVERNMENT!!!!!

    5) And lastly can the uncle-uncle and auntie-auntie at the POS offices handle the sudden surge in demand for counter services as a result of the cash rebate?? Judging from the services and experiences I had with those uncles and aunties, I don't think so!

    Anyway, I am not all critics and no help. My suggestion is why not implement the rebate in the form of income tax relief/rebate base on income level?

  2. moritzreithmayron 23 Oct 2008 at 4:58 am

    A subsidy creates a disequilibrium in the petrol market in Malaysia because it increases supply and the supply curve shifts outwards, away from the equilibrium. Therefore, the quality demanded increase because the price of gas decreases. Without the subsidy, the market would move to the equilibrium.

    There are several things that the Malaysian people would do after such a high increase in gas prices besides demonstrating of course. First of all, it will cut down driving. Secondly, the Malaysians will start using Public transportation. Another thing, they may do is going to a neighbouring country, such as Singapur, and buy enough fuel for the next few months at the market price in Singapur.

    By making fuel prices rise and foring consumers to pay more in the short-run, the market would react by a decrease in quantity demanded. Hence, the equilibrium would move down the demand curve in the long-run causing prices to drop.

  3. Nicolo' Fanellion 30 Sep 2009 at 3:11 am

    Subsidy created disequilibrium in a product market, as competition cannot occur, and thus, prices always stay as the government dictates. This however, does not take into account any shifts in demand or supply: for example if people start receiving higher incomes, the price of a product should increase, whereas if the contrary happens, they should decrease. Thus, in this case it proved proficient for the people in Malaysia, as the price they had to pay for oil was lower than the actual price they should have paid, but the opposite could also have happened, where the price people have to pay is too high. Thus disequilibrium is created, making demand either too high or too low.

    Malaysian oil consumers could respond to the increase in the prices of oil either by using their car less, using more public transportation (even though the quality is not great) or buying other cars which use cheaper, and possibly renewable, oils. Otherwise, they could also adapt to this change by moving in cities, where cars are not needed very much, since one could handle work and other things just by walking and thus stopping using the car.

    Because fuel is now more expensive less people are going to buy this good. Thus, there will be less demand for it (in a Demand Curve, there is an inverse relationship between price and quantity), which will make the supply levels go down in the future to adjust to the new demand. If supply and demand both decrease, the two lines will then meet again at a new point, lower and thus will make the prices and quantity demanded and supplied less at the new equilibrium.

  4. Sakktion 30 Sep 2009 at 4:07 am

    A subsidy is an injection into the economy from the government. Any kind of injection, including loans and investments, will cause the economy to be unbalanced. Only if the sum of the injections equals the sum of the leakages, then the economy will be in a stable state of equilibrium. Since, the Malaysian government has been subsidizing fuel too much; it has affected the economy negatively, since not enough money was spent in other industries and in the society, counting public transport. Thus, the large subsidy from the Malaysian government will create disequilibrium in the petrol market.

    It is not very easy to respond to a situation like this in a country like Malaysia, where it is not convenient to take public transport. In my opinion, Malaysians would continue to use their cars and just accept the fact they have to spend a larger amount of their income on petrol. However, two things that Malaysians could do is to either move to a different country, where petrol is sold at a much cheaper price or look for another alternative. For example, people who don’t travel a long distance to go to work or to school might want to purchase a bicycle or just walk a lot more than they normally do.

    Since, the price of the fuel increases, the quantity demanded for the product will obviously decrease, since that is stated in the Law of Demand. However, this is a very bad outcome for the Malaysian petrol industry, since their revenue will decrease by large amounts. However, in the long-run the quantity of petrol would increase, since less of it is being purchased. In order to have a stable petrol industry, the firms might have to decrease their price again, since they will have the usual supply and will lead to an increase in demand until both demand and supply are the same, which will signify the new equilibrium of the petrol industry.

  5. Christopheron 30 Sep 2009 at 10:54 pm

    This is because the government is inserting extra money into the market so that the people can use fuel without feeling the economic pinch that the rest of the world has been feeling. This has therefore created a disequilibrium because the government has been inserting money into the market but with no income coming back because they are all investing it into something that will benefit the people but they will not be feeling the economic hit and therefore will continue paying their regular price that they have always been paying.

    If the price of fuel increases then this will give people the initiative to either start using public transport much more and with the government rerouting all the funds that they were giving to the petrol market to the public transport market, I believe that this is what the government of Malaysia hopes to happen. There is also another choice in that people will start buying more fuel efficient cars and selling all of their older inefficient cars or that they will stop using cars in the first place at all and start using bicycles or maybe just walking.

    More and more people will want to move to other modes of transport as the subsidy is taken away. Once this happens, however, people will sell but their cars or rethink their financing ways in order to find the least expensive mode of transport. Since this change will also mean that public transport will become more efficient and less expensive because of the increase in prices of petrol then people will start using the public transport and then when the gas prices reduce once more public transport will have changed many Malaysian lives in that they will continue using public transport instead of deciding to go back with the car.

  6. Nicolo' Fanellion 30 Sep 2009 at 11:22 pm

    Correction to my first post after reading the text: …but the opposite could also have happened, where the price people have to pay is too high if a minimum price above Pe had been set by the government.

  7. Hannaon 01 Oct 2009 at 12:30 am

    If a subsidy is given to a firm for a certain product, in this case petrol, then the supply curve for the product will shift vertically downwards by the amount of the subsidy, because it reduces the costs of production for the firm, which means that the firm can supply more of the product. Disequilibrium occurs because, since the government is intervening, the free market does not work as it otherwise would, which means that there is no competition between petrol firms, which means that equilibrium between supply and demand will not occur.

    When the petrol prices increase due to the removal of the subsidy, the consumers in Malaysia will respond by using their car less, buying a car that uses less petrol, or using more public transportation. It is very likely that people will start using public transportation more often, since the government was planning on lowering the price for that, which will encourage people to travel publically rather than with their cars.

    Making fuel more expensive to consumers in the short-run would lead to a fall in oil and fuel prices in the long-run because the demand of oil will fall as the price increases. Therefore, less oil will be supplied because the demand has decreased. This will lead to a new equilibrium which is lower than what it was before the government interfered.

  8. Noraon 01 Oct 2009 at 1:02 am

    A subsidy creates disequilibrium in a product market because the actual relationship between price and supply and price and demand can’t take effect. The price of petrol seems lower to customers, which is why more quantity is demanded, but the supply can’t keep up with the high quantity demanded. The high quantity demanded would, without government intervention, cause the price to rise and therefore the supply to rise, which would then be equilibrium.

    With a 40% increase in petrol prices customers will a) drive less (consume less petrol) and b) look for alternatives to driving (public transport).

    Making the fuel more expensive will cause a fall in quantity demanded, which could then even lead to a decrease in demand if alternatives (substitute goods) are preferred to driving. The high prices will, on the other hand, make firms be able to increase their output, and so the quantity supplied will increase. A lower demand and higher supply will cause a fall in fuel prices.

  9. Sarah Ebleon 01 Oct 2009 at 3:28 am

    A subsidy creates disequilibrium in a product market because the seller/ supplier has more money to produce and to pay costs. Therefore the supply increases, meaning it goes away from the equilibrium and the quantity demanded increases as well.

    If you now take away that subsidy, the fuel supplier will face a drastic change: less buyers, less profit, more costs. In some cases, it will ruin the supplier/producer.

    Normally, consumers would probably switch to public transport, but in Malaysia it would probably be even more expensive and the quality is pretty bad. So therefore, the consumers would probably just accept the high prices and pay them. But, it is possible that they would switch to cars that use less fuel which would then lead to a better and healthier environment.

    Sellers would have to compete with each other in order to attract more buyers. Buyers are likely to buy the cheapest fuel, so every seller needs to go further down with the price as his rival: COMPETITION. So therefore, in the long-run fuel prices will fall.

  10. Pilaron 01 Oct 2009 at 4:48 pm

    1. Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy creates disequilibrium in a product market because if the price of a certain product goes down people will start to buy and demand more of this product resulting in a shift of the quantity demanded to the right and so resulting in disequilibrium.

    2. Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    – If the consumer sees that the petrol prices have increased by 40% they might start to think if they want to keep on driving their car and not better change to public transportation. This would so result in a demand for more public transportation and a decrease in the demand for petrol.

    – Consumers might want start buying cheaper cars because of the high prices of petrol and so resulting in a decrease in the demand for expensive cars and an increase in the demand for cheap cars. Many luxus cars firms might eventually have to shut down their firms.

    3. How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Making fuel more expensive to consumers in the short-run and actually lead to a fall in oil and fuel prices in the long-run could happen because the suppliers might recognize the decrease in the demand of fuel and so want to make the fuel prices cheaper for the consumers to eventually increase the demand for fuel.

  11. sebastian frischon 01 Oct 2009 at 5:13 pm

    A subsidy creates disequilibrium in a product market because the relationship between supply and demand becomes unbalanced. When looking at this case, the price of petrol appears to be cheap in the eyes of the consumers, which causes the demand to rise. In response, the oil firms can’t keep up with the high demand and therefore lack in supply. Without the governments help, the oil price would raise and the firms now have the chance to provide the needed supply. This way, there would be a stable equilibrium.

    Consumers may respond to the 40% increase, by making more usage of public transportation, which would cause public transportation companies to raise their ticket prices.

    Making fuel more expensive to consumers would cause a decrease in demand. Due the low demand, the income and profit gained by the oil firms will also decrease. In order for the oil firms to cover their costs, such as wages and rents (factors of production), the companies will be forces to decrease the price of their product in order to sell more.

  12. Silvia Dieteron 04 Oct 2009 at 8:53 pm

    1. Subsidy creates disequilibrium in a product market like the petrol market in Malaysia because when the demand of gas decreases the quantity demanded increases. Therefore the supply of gas increases and so the supply curve shifts to the right, which creates disequilibrium.

    2. When petrol prices increase by 40% once the subsidy is removed in Malaysia, consumers might start to use public transportation which would cause an increase the demand for public transportation and a decrease in the demand for petrol and consequently a decrease in the vehicle market. Consumers might also stop buying cars or switch from a big car to small car which are fuel efficient and therefore cheaper. This would also lead to a decrease in the car market mainly for big cars.

    3. Since an increase in the price of oil leads to a decrease of the demand of oil, oil and fuel prices will fall in the long-run. Therefore, the supply of oil will decrease because the demand decreased.

  13. kvoskuilon 05 Oct 2009 at 4:44 am

    If in a market the government is subsiding the petrol costs to keep them low then the demand will slowly increase since more is needed in production. The demand will increase but the supply will stay constant the consumers are unaware of this and an excess demand will be present, meaning there is more being demanded than supplied. No competition is also present because the price has stayed constant. However, the Malaysian government has not though their subsidy out; they have spent, around $17 billion to keep the price low, which they could have used, for example, for the infrastructure. The opportunity cost of subsidizing petrol would be not being able to improve the infrastructure.

    As an alternative to buying high priced petrol; Malaysians could possible take public transport or travel by bike or on foot. Public transport usage would increase if the petrol prices rise because not many Malaysians would want to suddenly pay for the petrol that had just become 40% more expensive. Another alternative to petrol would be by bike or on foot. This might be more time consuming but it would save the petrol indent in your income.

    According to the Law of Demand, as the price increase the quantity demanded will decrease. This has recently happened in Malaysia. Many firms will realize that their price are not affordable for many consumers thus they will have to lower their price to get consumers to buy their petrol. So, in the short run the price will increase due to the removal of tax subsidies, in the long run, the prices will decrease because not enough is demanded.

  14. Lara Fuhrmannon 23 Oct 2009 at 3:05 am

    1.Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy creates disequilibrium, because if the demand decreases the quantity demanded increases and so it would be a shortage in the quantity demanded.

    2.Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    Once the subsidy is removed and the price for petrol still is high, the consumers will change to public transports, such as trains, trams and buses nstead of using their cars.

    Or they would go with a bicyle or they would walk, if the opportunity cost to lose money for the petrol would be less then walking the way to work.

    3.How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    If the price increases the demand will decrease, so the supply will decrease as well, therefore they will fall in a long-run. Because i the price goes up the quantity demanded decreases and after a while also the supply, becaus their will be a surplus.

  15. Beatrice Benderon 23 Sep 2010 at 3:35 am

    Discussion Questions:

    1. Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy is a financial aid given by the government to the domestic petrol industry in Malaysia, in order for them to produce more of a certain good. Positively for the firm, their production costs will be lower, but it will have a negative influence on competition. Therefore the disequilibrium, because it reduces the competition of similar companies and substitute ones.

    2. Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    Firstly the consumers demand will radically decrease since the prices are increasing by 40% and they will look for substitutes for driving their cars such as walking, biking, public transport. Or they might pay high for petrol.

    3. How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Making the fuel more expensive will lead to more consumers choosing substitutes for driving such as walking. Therefore the demand will first of all fall, with that the prices and at the end oil and fuel will be in competition in a free market. There will be more incentive in the industry to invent in innovative new technology e.g. ethanol for cars.

  16. Tim B.on 24 Sep 2010 at 2:27 am

    1) A subsidy creates disequilibrium in a product market because if the price of a good or service decreases the supplier has more money to invest in their company and to increase their productivity. This will cause that consumers demand more of this good or service which has the result that the quantity demanded increases which creates disequilibrium.

    2) On one hand Malaysian oil consumers could respond to the increase in price with using their car less and switching to public transport, walking or biking. They could also switch their car for a less oil-using car. This would make the consumer better off, because he depends less on the price of the oil. The use of an electro car would also become more efficient for the consumer, because with this kind of car he does not depend on changes in the price of oil at all.

    3) Making fuel more expensive to consumers in the short-run would lead to a fall in oil and fuel prices in the long-run because the demand of fuel will decrease due to the fact that consumers would use more public transport or use their car less. This will cause a decrease in the supply curve in long-term. The price will go down to raise the attention of consumers (Competition).

  17. The Other P.on 24 Sep 2010 at 3:33 am

    1. Goverment subsidization creates an inequality in the petrol market as other firms and providers of substitutional goods cannot hope to be able to cut costs as effeciently and hence have to sell at higher prices.

    2. Consumers may either buy petrol in a frenzy or plan to sell their car and/or buy a bike (substitutional good)

    3. As demand drops, which it will because of an increase in prices, the price will drop too.

  18. Larissa Wezenbergon 24 Sep 2010 at 4:12 am

    1. A subsidy is when the government pays a producer to make more of the good. In Malaysia, it is a financial aid given by the government to the domestic petrol industry. When the demand of petrol decreases, the quantity demanded increases. Therefore the supply of petrol increases. The supply curve will shift to the right, creating a disequilibrium.

    2. When the petrol prices increase by 40%, the demand for petrol will decrease drastically. The people will look for substitutes for driving their cars. They might start taking more public transportation, walk, bicycle and buy cheaper cars. This then also decreases the demand for expensive cars and increases the demand for cheap cars.

    3. Making the fuel more expensive will lead to more consumers choosing substitutes for driving such as taking public transport. This will make the demand for fuel decrease, creating competition in a free market. If there is less demand for fuel, the prices would have to go down again to make the demand increase so that more people will buy it, otherwise the companies will lose a lot of money by not having enough costumers.

  19. Emma Walwyn Brownon 24 Sep 2010 at 4:14 am

    1.Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    Subsidy creates a problem of disequilibrium in the product market because substitutional goods for the ones being subsidized cannot lower their prices to compete with the subsidized company. They cannot lower their prices because they can't produce efficiantly enough to lower prices and still make a profit.

    2.Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    Many comsumers will invest in more fuel efficiant cars, therefore they won't burn so many gallons to the mile and won't have to purchase as much petrol as they did previously. Secondly, they may use their car less or sell it and buy a bike or use public transport.

    3.How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    The prices of fuel could fall in the long run because the high prices will lead to a drop in the quantity demanded, therefore to get more quantity of fuel demanded again the fuel companies will have to lower their prices to get business.

  20. Gunjan Vengon 28 Sep 2010 at 12:09 pm

    1. Subsidy creates disequilibrium in the economy because the producers are getting more money to make the product, increasing productivity. Since the productivity is being increased, there are more products and the quantity demand increases, which in turn creates disequilibrium.

    2. Since the price of petrol increases, people might want to stop using their car so much. This might cause the people to use public transport more. They might also want to switch to hybrid cars.

    3. Since fuel is now more expensive, less people are going to want to buy it, which means the quantity demand decreases. If there is less demand, the companies would have to decrease their prices again in order to attract people to buy their petrol again.

  21. Konstantin Bon 28 Sep 2010 at 12:10 pm

    1. A subsidy creates a disequilibrium because it will lead to increased production at lower prices and hence increasing the quantity demanded. This means that a disequilibrium is created. In Malaysia's case the government's subsidy lead to lower fuel prices, therefore the quantity demand increased.

    2. Instead of driving people could walk or take public transport. In the long run they will change to more fuel-efficient vehicles and hence decrease their spending on fuel.

    3. A higher price will in the short run lead to a decrease in quantity demanded. In the long run however, the consumers will switch their consumption to substitutes which is a decrease in demand. This means the demand curve shifts to the left and the new equilibrium will be at lower quantity and price than the original.

  22. Isabelle Yon 28 Sep 2010 at 12:15 pm

    ||||| Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy distorts the natural working ways of the market. When the subsidy was still in effect, consumers did not think about saving money on petrol because it was so cheap ! They didn't think about using it efficiently or responsibly because they didn't bear any of the burden of rising oil prices. The demand is higher than the true free market equilibrium demand. The demand is kept the same even though the prices of petrol are actually rising in the background.

    ||||| Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    Consumers may respond by not buying anymore new cars, limiting the number of journeys they make, carpooling, taking alternative routes ("shortcuts"), or maybe choosing to walk or cycle instead. Basically, they will try to save fuel.

    Someone who used to drive to work alone may now choose to catch a ride with four other colleagues who live in the same condominium and work at the same office so that everyone saves money on petrol. They could take turns too (:

    Consumers may respond by taking public transport instead (where convenient) because that is still subsidized by the government and will be cheaper that paying the price of fuel needed to drive there.

    In states all over Malaysia, on the very day the subsidy was to be removed, there were massive queues at all the petrol stations as drivers were desperate to fill up their gas tanks to the max before the prices went up. (This happened in KK too ! I witnessed it. It was so congested that the usual 10 minute drive home from school took up to 2 hours in traffic)

    |||||How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Well, at first the fuel prices will be more expensive as soon as the subsidy is removed but then, demand for petrol will start to fall as consumers become unwilling to pay the high price. Consumers will turn to alternative forms of transport (like cycling & walking). As the demand falls, eventually so will the price.

  23. Se Uk Shinon 28 Sep 2010 at 12:17 pm

    Se-uK

    1.Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    This is becasue subsidy create the increase in supply as government involves in producing petrol.

    2.Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    Consumers pretent to take public transport because the petrol for their own cars is much higher than before. For example, people will buy bikes instead of buying petrol for cars. Secondly, consumers will try to find out the other sources which can replace petrol. For instance, people will try to use LPG gas to use.

    3.How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    As the demand for petrol prices increases, there will be less quantity demanded for petrol. Also supply for substitutes will increase. This will lead petrol to decrease in price for making consumers to start buying petrol again.

  24. Yu Shengon 28 Sep 2010 at 10:06 pm

    1) Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy creates disequilibrium as subsidies lower the price of the petrol market in Malaysia. With lower prices, the quantity demand increases and there isn't enough supply to meet what is demanded. There will always be a lack of quantity supply and it will never meet with the quantity demanded. (Disequilibrium)

    If there isn't a subsidy, the firms would increase the price of the petrol and the quantity demanded will be less and the quantity demanded and the quantity supplied would be the same. (Equilibrium)

    2) Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    First, the people may choose to use public transportation more often as it would save their money on the increase petrol prices.

    Second, people in malaysia can switch to hybrid cars which save them the consumption of petrol which in turn would also save their money.

    3) How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Making fuel more expensive in the short run would cause people to find other alternatives than using their own cars. This causes the demand for oil to fall and as the demand for the oil falls the price of the oil will eventually fall too.

  25. Nathanon 28 Sep 2010 at 10:09 pm

    A subsidy, not only in the petrol market, but in every market always shifts the supply curve right, that is an increase in supply because the price of production has been lowered by government intervention. If the demand for the product does not rise accordingly, but the suppliers keep making more of it then eventually a glut form as petrol floods the market and nobody buys it. Normally, over the long term, this would then lead to a decrease in the price of petrol, so as to clear the market of the excess petrol.

    Malaysian consumers may react in one of several ways to this increase in price.

    They may for example decide to shift their consumption to a direct substitute of petrol and run their cars on biofuel, but this a highly unlikely response in a developing nation like Malaysia. Or, they can respond by switching consumption to public transport. This causes a shift in the demand for car transport, a compliment for fuel, and leads to a decrease in demand in both markets. This option seems more likely.

    Making fuel expensive will, in the short run, lead to a decrease in demand for oil and fuel prices and people replace them with substitute goods. This then creates a glut on the market as demand is too low to meet the supply. In theory, the price of oil should then fall until the market clears, and finds a new point of equilibrium.

  26. junfengon 28 Sep 2010 at 10:33 pm

    1.Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    Subsidy is a sort of policy that government set up in order to encourage the market, therefore everyone are trend to be more personal preference to self-driving caused by the fall price of petrol. And the quantity demand will increase and that will lead to a Quantity Demand shift to the right, so there subsidy of petrol market in Malaysia will create disequilibrium in the market.

    2. Give two examples of how consumers may respond to the 40% decrease in petrol prices once the subsidy is removed in Malaysia?

    First of all, because of the removing subsidy policy and the prices of petrol are increasing back so people might make a opportunity cost of taking less self-driving instead of taking public transportations, and secondly, consumers could choice another sort of cars that run out without petrol or less, maybe electricity cars?

    3. How could making fuel more expensive to consumers in the short- run actually lead to a fall in oil and fuel prices in the long- run?

    Making fuel more expensive to consumers will change people' preference of the fuel and the quantity demand of petrol will decrease and that the market therefore would be in a excess supply situation, so the best way of dealing it is reducing the fuel prices so that the market will trying to be back in the equilibrium level, and it needs a long period of time.

  27. Chouvalit Con 28 Sep 2010 at 10:47 pm

    Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    Although subsidy will most likely to move the supply curve to the right, well that’s the general rule. In this case (from the information given), the subsidy did not shift the supply curve to the right, instead, it lower the price and cause the quantity demand to increase which will then cause excess demand since there is not enough petrol to satisfy every customers. (disequilibrium)

    Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    one example would be that, the consumers will start to find alternative means of transportation, public transports, carpooling and or bicycles for example. The other example is to use less petrol, driving less or a more economical car engine (which burn less fuel for the same distance.

    How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run.

    the market will always find the way back to the old equilibrium. By increasing the price of petrol the people will try to find alternative or reduce usage of petrol, and when they do find the alternatives to fuel, it is most likely that they will stay to that alternative until the fuel price decrease or they might just stick to that alternative. By reducing the consumer’s quantity demand, the fuel producer will have to decrease the price on fuel to gain customers which will then send the supply and demand graph to it’s equilibrium state.

  28. Susanne Robertsonon 29 Sep 2010 at 4:18 am

    1.Subsidies are grants paid by the government to suppliers. This results in the price to be lowered artificially. In regard to other petrol produces in Malaysia, they are disadvantaged because they obviously must set higher prices to make a profit and to cover all costs of production. Subsidies can force similar companies to stop production, disregarding the fact that they can produce more efficiently than the subsidized company which ultimately leads to disequilibrium in a product market.

    2.As the petrol prices increase by 40% the Malaysians will respond in obvious ways. Evidently, they will walk, cycle or use public transportation. Secondly, there could be an increase in demand for fuel-efficient or even battery-operated cars.

    3.If the petrol prices were to increase the demand for it would obviously decrease. Therefore, people would be forced to change their habits by switching to fuel-efficient cars and perhaps altering their heating systems to geothermal systems. The law of demand states that, all other things equal, more will be demanded at lower prices than at higher prices. In this case, this law can be illustrated with the increase in petrol prices. As fewer consumers buy petrol, the price will fall to attract potential customers. Once the demand for petrol increases again, the prices will increase to maximize profit and to produce enough to satisfy the consumers.

  29. Cedric Uribeon 29 Sep 2010 at 6:00 am

    1. Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy is a grant that the government pays to firms to lower their cost of production so that firms are able to supply more. A subsidy creates disequilibrium in a product market like the petrol market in Malaysia because since the government is granting petrol firms with subsidies, petrol firms lower their prices but substitute firms cannot lower their prices to compete with the subsidized firm as they wouldn't be making any profit if they were selling under their cost of production price. Therefore, disequilibrium in a product market is created because you have two substitute firms selling at different prices creating disequilibrium.

    2. Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    Consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia by taking public transport or carpooling and the second example is that people in Malaysia would buy more fuel efficient cars as the cars would not require so much petrol and the people would not have to pay the rising prices. This would decrease the quantity demanded for fuel which correlates of the increase in price. (law of Demand)

    3. How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Making fuel more expensive to consumers in the short run could actually lead to a fall in oil and fuel prices in the long run because at the moment, with the price of fuel being high, the quantity demanded is obviously low but in the long run, when Firms are running out of business as no one wants to buy fuel that is costly(low quantity demand) firms would have to lower their price so that they can earn profits. By doing this, they would increase the quantity demanded.

  30. Yuto Takaokaon 29 Sep 2010 at 2:55 pm

    1) Subsidy from the government creates disequilibrium as the supply curve shifts to the right until equilibrium is reached at maximum price. As the result, the household demands more than the equilibrium as the price is low and the firm can also supply more as they have the money from the government to produce this.

    2) One way in which the consumers may respond to the increase in petrol price is to buy a new compact car in which requires less petrol. This may also mean hybrid car where you don't need petrol. The reason for the consumers to buy compact car when the petrol price increases is obviously because they are substitute of each other. However, this depends on whether the price increases by large amount in short or long term. When the price increases gradually, people will buy a new petrol efficient car as they think they can benefit more by doing so over time. When this is short-term increase in price, the consumers will most like just stop using the car.

    Another option is to use public transportation. As the government plans to subsidize the price of public transportation, the consumers will find more benefit in using it, instead of paying extra 40% a year to use their car.

    3) Making fuel more expensive to consumers in the short run lead to a fail in oil and fuel pince in the long run as when the price increases, the quantity demanded decreases as people can't afford paying the money. This way the consumer will change the transportation into public transportation or other way in which they can afford it. Consumers will be less willing to buy a new car and therefore the demand decreases again.

  31. Dong Hun,Jangon 30 Sep 2010 at 9:49 am

    1. Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    By the subsidy, it can create the disequilibrium because by get the subsidy, the producers can produce more product by the subsidy, which mean it can increase the supply and increased the quantity demand. therefore, it creates to disequilibrium.

    2. Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    By increasing of petrol price, people prefer to using the public transport or walk to go to the place instead of using car.

    3. How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    by making fuel more expensive to consumers in the short-run will lead to a fall in oil and fuel price in the long-run when price increase. it causes to people to choosing ride pubic transport instead of using their own car or by new car because of price increase. so that later on, there will be less people to willing to buy a new car so that it goes to decrease the demand of oil and fuel.

  32. Erick Chanon 30 Sep 2010 at 6:43 pm

    1. Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    Because the government provides a petrol subsidy, which means the petrol price decreases to customers. They cost lesser money in using petrol, so the demand for petrol increases, the curve of QD shifts to right. But at the same time, the quantity supplied is not enough to satisfy the demand, so the equilibrium point goes upper, and there is a excess demand (disequilibrium).

    2. Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    As the price goes up, customers may:

    1. Use more public transportation, cycling or walking instead of driving their own car;

    2. Buy a smaller car which requires less petrol to run, or a green car which uses new type of energy such as hydrogen or electricity.

    3. How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Making fuel more expensive actually decreases the quantity demanded, that many people choose to change their habits and turn to public transportations in order to save money. The quantity supplied is excess as fewer people are willing to pay for expensive petrol. In order to sell more petrol, petrol suppliers need to lower the petrol price, otherwise, they could not make enough profit at such a low demand.

  33. Ashraf Zainalon 01 Oct 2010 at 12:09 pm

    1) Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy would create a disequilibrium in a product market, such as the petrol market in Malaysia, since the quantity demanded will increase. Since there's more demand, there will also be an increase in quantity, therefore causing the demand curve to shift to the right, and therefore causing a disequilibrium in the product market.

    2) Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    If there is a 40% increase in petrol prices after the subsidy has been removed, then a majority of the consumers may start to use other related products for transportation such as taking public transportation, using a bike, or walking.

    3) How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    Making fuel more expensive to consumers in the short-run may lead to a fall in oil and fuel prices in the long-run because making fuel more expensive will decrease the quantity demanded by the consumers and so people will most likely use public transportation or bikes or walk. The quantity supplied will increase and therefore cause a disequilibrium. There will be excess supply and therefore the prices of oil and fuel will decrease until it reaches a point where the quantity supplied is the same as the quantity demanded.

  34. Aleksi Piltonenon 04 Oct 2010 at 11:29 am

    1. A subsidy in a petrol market causes disequilibrium because when the government subsidies companies to produce petrol, the price of petrol goes down. This means the price is not in equilibrium point anymore, because the price goes down, the demand goes up

    2. two examples:

    – Because the price increases 40%, some of people have not money to drive car anymore so they have to start thinking about alternative choices such as public transition. (increase in the use of public transition, train and busses)

    – People who have money to drive car, they may start buying cars that are cheaper to drive in order to save money. People start preferring cars that don't use so much petrol. (increase in the selling of cheap and small engined cars)

    3. Because when the prices are put up in really short time, petrol companies notice that the price is too high and the oil and petrol selling falls dramatically. They start putting prices lower in order to achieve equilibrium of the market. Summary: too high price, excess supply -> companies put price lower, reduce in supply= equilibrium

  35. Dong Hwion 04 Oct 2010 at 7:44 pm

    Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    When the price is set at a maximum price the quantity demand exceeds the quantity supply. Without the government interference, there will be a shortage and disequilibrium in the market.

    Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    In a short term, people will stop using cars and use another means of transport. They will reduce their use of cars because of the high fuel price and find alternative ways such as using public transport. However in the long term, people will buy hybrid or LPG cars which substitutes petrol powered cars. They think that it will save their money in the long term.

    How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    When the oil and fuel price increases, consumers will find alternative ways of transport. The quantity demand for fuel will decrease, leading to a decrease in the price in the long run.

  36. Miho Ohashion 04 Oct 2010 at 8:40 pm

    1. Subsidy from the government causes disequilibrium because subsidies lower the prices of the petrol in Malaysia. The supply curve will shift to the right (Subsidy).

    2. Two examples will be the consumer may use alternative ways of transportation such as public bus and MRT, or they may also use hybrid car.

    3. The consumer may not be able to pay or afford to pay as it leads to decrease in demand. People may use public transport instead of using their own car due to increase in price of petrol.

  37. Kevin Jungon 04 Oct 2010 at 9:42 pm

    1. Subsidy creates the disequilibrium in a product market where maximum price is set when the subsidy is not given. In the assumption when subsidy is not given, there will be a shortage that is shown in the graph, where the gap exist in between QD and QS. However, when subsidy is given to supplier, than there will be a shift of supply curve to the right, and this will not occur disequilibrium.

    2. Consumers than tends not to purchase petrol as the price of petrol is increased due to removal of subsidy. Therefore, the demand curve will shift to the right. Plus, in long-run, people will buy more small cars and decrease the quantity of purchasing large cars. As a result, the price of small cars will increase, and price of large cars will decrease. Moreover, people will tend to purchase more on substitute goods.

    3. Making fuel more expensive to consumers in the short run could actually lead to a fall in oil and fuel prices in the long run as the price of fuel will permanently constant in relatively higher price, people start to change to the uses of related goods in consideration of purchasing petrol. And in order to satisfy consumers, the market has to decrease in price of petrol eventually.

  38. Renee Ron 05 Oct 2010 at 11:53 am

    1) Why does a subsidy create disequilibrium in a product market like the petrol market in Malaysia?

    A subsidy creates disequilibrium because when a subsidy is introduced it lowers the price of petrol market in Malaysia. In turn with lower prices, the quantity demanded increases and there is not enough supply to meet demand, this causes a "disequilibrium", there will always be this deficiency of supply not meeting demand. If no subsidy is introduced then businesses would increase the price of petrol the would cause the quantity demanded to decrease and therefore eventually demand and quantity supplied would be the same, or reach equilibrium.

    2) Give two examples of how consumers may respond to the 40% increase in petrol prices once the subsidy is removed in Malaysia.

    People could utilize public transport more as they would save money on petrol for their own personal vehicle or people in malaysia could also switch or start to buy cars that consume less petrol and use the petrol more efficiently to save on the amount of petrol they consume and therefore the amount of money they spend on petrol.

    3) How could making fuel more expensive to consumers in the short-run actually lead to a fall in oil and fuel prices in the long-run?

    When the fuel is made more expensive in the short run would cause people to look for alternatives like the things in question 2, because it has become more expensive to fill their own personal cars with petrol than before. This would then cause the demand for fuel to decrease and therefore to counter this decrease in demand and to gain an equilibrium again the price of fuel would again fall in the long run.

  39. Xu Minon 05 Oct 2010 at 8:47 pm

    1)Assuming that when the price is set at a maximum price the quantity demand exceeds the quantity supply. There will be a shortage and disequilibrium in the market.

    2) In a short term,people will tend to take public transport instead of driving their private car, however if it happens in a long term, people may buy hybrid or LPG cars as a substitute of petrol cars in order to save their money.

    3) The increase of oil and fuel price, causing consumers to find out alternative ways of transport. The quantity demand for fuel will fall, leading to a decrease in the price.

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    Letting markets work: the Malaysia fuel subsidy goes bye bye | Economics in Plain English

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    Letting markets work: the Malaysia fuel subsidy goes bye bye | Economics in Plain English