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.

The Associated Press: Gas prices knock bicycle sales, repairs into higher gear

Greg Mankiw has an ongoing series of posts linking to articles illustrating the impact that rising gas prices have had on demand in markets other than that of the automobile.

The concept of cross-price elasticity of demand measures the responsiveness of consumers of one good or service to the change in price of another. As gas prices rise, drivers tend to switch from automobiles to alternative forms of transportation. A few days ago I blogged about the switch from tractors to camels in India, one illustration of the concept of cross-price elasticity of demand. Mankiw has so far linked to articles about the impact of high gas prices on demand for bicycles, small cars and mass transit.

These three “goods” are all substitutes for the most common form of transport among Americans, the private automobile (often times a gas-guzzler in “the bigger the better” America). The principle of cross-price elasticity of demand says that when the price of a good like personal vehicular transport becomes more expensive (in this case due to the price of an input required in private cars, gasoline), the demand for a substitute good will increase.

In the case of bicycles, evidence indicates that just such a change in demand is already underway in America today:

Bicycle shops across the country are reporting strong sales so far this year, and more people are bringing in bikes that have been idled for years, he said.

“People are riding bicycles a lot more often, and it’s due to a mixture of things but escalating gas prices is one of them,” said Bill Nesper, spokesman for the Washington. D.C.-based League of American Bicyclists.

“We’re seeing a spike in the number of calls we’re getting from people wanting tips on bicycle commuting,” he said.

Interestingly, the increase in demand for bicycle travel in response to high gas prices might be even more pronounced due to America’s sluggish growth, 4% inflation and rising unemployment. Real wages have seen little gain in the last couple of years as growth has fallen close to zero while prices have continued to rise. It may be possible that a fall in real incomes in America has spurred new demand for bicycle transportation, which could be considered an inferior good, meaning that as household incomes fall, consumers demand more bicycles for transportation.

Since bicycles represent such a drastically cheaper method of transportation, high gas and food prices, a weak dollar, and falling real wages accompanying the economic slowdown have had a negative income effect on American consumers, leading to increases in demand for inferior goods such as bicycle transportation

That said, having worked in a bike shop myself for two years in college, I can say that most consumers looking at new bicycles are not doing so because of falling incomes. Quite the opposite, in fact, indicating that new bicycles are normal goods (those for which as income rises, demand rises). However, the article states that in addition to increases in new sales, “more people are bringing in bikes that have been idled for years”.

It may be that while new bicycles themselves are normal goods, bicycle transportation as a whole is an inferior good. The increase in demand for new bicycles could be explained by the substitution effect (as the price of motor vehicle transportation rises, its substitute, bicycle transport, becomes more attractive to consumers) and at the same time explained by the income effect too (as real incomes have fallen, demand for the bicycle transport has risen).

This phenomenon is an excellent illustration of how the income and substitution effects work in conjunction to explain the inverse relationship between price and quantity demanded for automobiles (the law of demand), as well as the concept of cross-price elasticity of demand between two substitute goods.

UN chief warns world must urgently increase food production - Yahoo! News

So you don’t say things that make you sound stupid to people who have studied economics, i.e. AP Econ students. Here’s UN chief Ban Ki Moon speaking at a UN conference in Ghana this week:

“One thing is certain, the world has consumed more (food) than it has produced” over the last three years, he said.

Ban blamed a host of causes for the soaring cost of food, including rising oil prices, the fall of the U.S. dollar and natural disasters.

He said he would put together a special task force to help deal with the problem and called on the international community to help…

“We need a real world and not the world of economic theories,” Ban said. “I will work on this right now with a sense of urgency.”

You know who says things like that? People who don’t understand the basic economic theories. Sadly, the theory Mr. Moon is missing here is one of our science’s most basic and simple to understand: that of supply and demand.

First of all, I’d just like to point out the absurdity of his first statement, that “the world has consumed more than it has produced.” Mr. Moon, I’d like to ask you this: If our world has not produced all the food we’ve consumed, then whose world DID produce it? Can’t we just call up the world where all the extra food we’ve consumed was grown and ask them to send us more?

Next, regarding Mr. Moon’s “task force” that he plans to form to deal with the problem, my question is this: What can a handful of bureaucrats accomplish around a table in New York that the market can’t do on its own? Rising food prices send signals to farmers who grow food; a signal that sends a very clear message: “GROW MORE FOOD!”

I’m sorry, but Mr. Moon and his “task force” can spend all the time and money they want brainstorming ways to get farmers to grow more food, but in the mean time the invisible hand of the market, guided by price signals sent from consumers to producers, will work its magic to allocate more resources towards food production and away from alternative uses of grain crops such as ethanol production, eventually shifting the supply curve of food out, stabilizing food prices.

Mr. Moon’s intentions are honorable, but his means of achieving his goal are misguided in an era of the market mechanism, which underpins most of the world’s agricultural economies today.

In recent years coffee consumers may have noticed more and more cafes are offering “fair trade” coffee as an option. Usually, for an extra 10 or 20 cents per cup, you can get a beverage made from beans that were grown by farmers earning living wages and working in safe and sustainable environments. In some cases, “fair trade” coffee is of higher standards, representing a higher quality product. The premium paid by consumers, in theory, will eventually result in better standards of living for coffee farmers and their families.

Mike Munger, chair of Duke University’s economics department, argues that “fair trade” products, while they may represent good intentions, probably don’t do much to help poor farmers. While the full podcast offers even more reasons, the clip below presents one clear explanation of why “fair trade” may actually make poor farmers worse off.

 

 Munger on fair trade [6:50m]: Play Now | Play in Popup | Download

Another interesting point Munger goes on to make relates to one of the models of economic growth we have been studying in IB Economics: the Lewis dual-sector model of structural change. According to the model, the path towards economic growth, which should create conditions that lead to economic development, requires the transition of workers from the low-productivity agricultural sector to the capital-intensive, high productivity manufacturing sector.

China, in its own economic growth, has demonstrated the success of this model, which involved rural to urban migration, employment of surplus labor from the farming sector in the industrial sector, giving workers access to capital, increasing productivity, output, income, saving, and investment, putting an economy on a path towards growth and development.

According to Munger, “fair trade” premiums paid to poor farmers create a disincentive for a farmer to migrate to the higher productivity industrial sector that may be emerging in his country. In essence, coffee drinkers in the rich world are offering a subsidy to farmers in the poor world aimed at keeping them poor. If the path to wealth and prosperity requires the transition to a capital-intensive industrial economy, then subsidies to poor farmers are only reducing the likelihood that they’ll achieve significant increases in income and savings.

Munger’s views are compelling, if a bit hard for a socially conscious, well-intentioned coffee lover like myself to swallow. I like to think that I’m helping farmers in the developing world when I drink “fair trade” coffee. If anything, Munger has at least made me think a bit harder about the true impact of the premium I pay when I choose “fair trade” next time I walk into Starbucks.

For the full podcast, click here: Munger on Fair Trade and Free Trade - EconTalk with Russ Roberts

Kite Powered Ship Sets Sail for Greener Futhre - Guardian.co.uk

A German engineer has given an old technology new life to help make trans-oceanic shipping greener and least costly.

A cargo ship pulled by a giant, parachute-shaped kite will leave Germany on Tuesday on a voyage that could herald a new “green” age of commercial sailing on the high seas.

The owners of the MS Beluga, a 462ft cargo vessel, will try to prove that modern steel ships can harness wind power and reduce their reliance on diesel engines.

During the journey from Bremen to Venezuela, the crew will deploy a SkySail, a 160 square metre kite which will fly more than 600ft above the vessel, where winds are stronger and more consistent than at sea level.

Its inventor, Stephan Wrage, a 34-year-old German engineer, claims the kite will significantly reduce carbon emissions, cutting diesel consumption by up to 20 per cent and saving £800 a day in fuel costs. He believes an even bigger kite, up to 5,000 square metres, could result in fuel savings of up to 35 per cent.

Here’s a thought… reduced fuel costs to trans-oceanic shipping companies should shift the supply of such services out, as the marginal cost of shipping falls. Greater supply will mean lower prices to customers demanding such services, moving downward along the demand curve, increasing the equilibrium quantity of trans-oceanic cargo journeys.

Question: Assume all cargo ships in the world eventually incorporate the sail technology, increasing the supply and reducing the price of shipping by an average of 20% and reducing the emission of greenhouse gases of vessels by an average of 20%. What would have to be true about the price elasticity of demand for trans-oceanic shipping in order for a 20% reduction in price to result in an overall reduction of greenhouse gas emissions by cargo ships? Depending on the answer to this question, this “green” technology could actually result in greater emissions of greenhouse gases by cargo ships.

Explain…

Well, not exactly, but that’s kind of a dramatic headline, isn’t it? The other day I blogged about the shortages experienced in the petrol market in eastern provinces, evidenced by the long queues at gas stations around Shanghai last weekend.

Petrol stations resorted to rationing their product in small doses (between 20 and 40 litres) as the price of oil hit $92 and Chinese refiners scaled back production due to rising costs that they were unable to pass on to their customers. Beijing had previously imposed a price ceiling on fuel in an attempt to keep inflation low and Chinese consumers content; the actual impact of this price control was predictable: not enough fuel to go around as the quantity demanded exceeded the quantity supplied, leading to shortages and rationing at the pump.

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Mali’s Farmers Discover a Weed’s Potential Power - Sept 6, New York Times

Can it be possible that a new use for an old weed could change the economic health of a nation and at the same time defy the law of opportunity costs? In Mali, farmers are choosing to plant more of weed called jatropha becuase it can now be turned into biofuel. It is a unique plant in that it needs marginal soil and requires little fertilizer. In class we have talked about how discovering a new resource can cause economic growth, how this can shift the PPC curve. But, can a country actually get the benefits of using this new resource with out any opportunity cost? Is what is happening in Mali an example of economic development or economic growth in the first place? Is this a supply or a demand issue?

But now that a plant called jatropha is being hailed by scientists and policy makers as a potentially ideal source of biofuel, a plant that can grow in marginal soil or beside food crops, that does not require a lot of fertilizer and yields many times as much biofuel per acre planted as corn and many other potential biofuels. By planting a row of jatropha for every seven rows of regular crops, Mr. Banani could double his income on the field in the first year and lose none of his usual yield from his field.

You be the judge of why Mali is making the decision to produce more jatropha. Is this a case for demand or supply? Which curve would shift? Which determinant is causing this shift?

But here in Mali, one of the poorest nations on earth, a number of small-scale projects aimed at solving local problems — the lack of electricity and rural poverty — are blossoming across the country to use the existing supply of jatropha to fuel specially modified generators in villages far off the electrical grid.

“We are focused on solving our own energy problems and reducing poverty,” said Aboubacar Samaké, director of a government project aimed at promoting renewable energy. “If it helps the world, that is good, too.”

This is very interesting information for you to consider as you are wondering about environmental sustainability, a real life economic issue.

Jatropha’s proponents say it avoids the major pitfalls of other biofuels, which pose significant environmental and social risks. Places that struggle to feed their populations, like Mali and the rest of the arid Sahel region, can scarcely afford to give up cultivable land for growing biofuel crops. Other potential biofuels, like palm oil, have encountered resistance by environmentalists because plantations have encroached on rain forests and other natural habitats.

But jatropha can grow on virtually barren land with relatively little rainfall, so it can be planted in places where food does not grow well. It can also be planted beside other crops farmers grow here, like millet, peanuts and beans, without substantially reducing the yield of the fields; it may even help improve output of food crops by, among other things, preventing erosion and keeping animals out.

So try to apply what you have learned about opportunity costs, economic growth and development, as well as supply and demand and analyze these economic events in Mali. I look forward to your comments

Demand Down, but Rents Up - washingtonpost.com

Alright, AP students… you are economics detectives and you’ve been assigned your first case. The mystery is thus: how can decreasing demand cause prices to go up? In chapter three, we are reading about product markets, the interaction of supply and demand, and market equilibrium price and quantity. You’ve read that prices are affected by the interaction of supply and demand. Clearly, if demand for a product rises, prices should go up unless supply increases a certain amount. On the other hand, if demand falls, then prices should fall unless supply falls at the same time.

So what’s happening in the article above? The headlines seems to proclaim an economic impossibility is occurring: as demand falls, prices rise! How is this possible? Is it? Is the market for apartments in the D.C. area defying the laws of demand and supply? Read the article and see if you can solve this economic mystery!

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Starbucks Raising US Drink Prices Next Week - Reuters.com

One of the first things that my jet lagged family noticed when we got back from San Francisco was that Starbucks had opened up around the corner from our house in Zhudi Town. Normally, my family travels far and wide to buy coffee beans at the Starbucks in Gubei or at the Portman because my husband Kevin, a sophisticated caffeine addict, needs his well roasted coffee. Now my husband can just walk down the street to find his fix. Let’s just say that he now is very happy. My kids, Maya and Cooper, are extremely happy too because when they walked into the Starbucks Café, some smiling ladies behind the counter gave each of them a free gift. The gift was small packet of yellow sculpting clay. So much for teaching them that there is “no such thing as a free lunch” early in life.

I, on the other hand, had a lot of unanswered economic questions running through my mind when we into the café, For example, why did Starbucks open up here in Zhudi? What would this mean for my favorite local joint, The Rendevous Café? Is competition always a good thing? And what about my core value of “think globally and buy locally”? All of these questions continued swirling around in my mind as I had breakfast (with nicely brewed tea) at the newly updated Rendevous Café. As we were eating, the local owners came by our table and personally welcomed us back from vacation. I commented on how nice the place looked and the owners told me that the updates to the restaurant were a response to the new competition from Starbucks and Johnny Moos. The owners looked a little worried. For a long time they have been the only place in town where locals and SAS facul