Price cap on baby milk : The right thing to do?

                       In a recent article I read on the Star online, parents are demanding the government to set a price ceiling on babies milk. At first glance, setting a price ceiling would be a great move to ease burdens on parents especially the middle income group of people. But, setting a price ceiling would actually mean setting the price level of baby milk below the equilibrium price level. Implementing a price ceiling on baby milk prices will disrupt the natural price that market forces impose to stabilise the quantities supplied and demanded for baby milk because of the interference from the government regulations.
First of all, a look on theprices of baby milk today. There are many types of milk to retail shelves today, ranging from the high end to the lower quality ones. If you go to hypermarkets today, we can see prices of baby milk at whopping prices. Take a high end brand Enfalac for example, it stores they cost around RM45 just for a 700 gram refill pack, which is insane. Besides that, baby milk is not the only thing parents have to spend on their babies. And another high end brand, Isomil Plus, recently advertised in the newspaper by Giant, a 700 gram milk powder tin is priced at RM58.99. From forums where mothers have their discussion with each other, I found out that the estimated cost of buying baby products is around RM1500. This includes things like milk bottles, diapers, food and nursing expenses. And if you want to buy toys and baby strollers, you need to add on another estimated cost of RM2500.

                  In my opinion, this problem is only occurring because baby milk is considered as an inelastic product. This means that even if the prices of baby milk are high, people will still need to buy them. Some may argue that parents can opt for cheaper baby milk sources, but how many parents would actually take risks and potentially harming the growth of their own child? This is why baby milk is considerably inelastic. Another source of argument would be parents can opt for soya milk instead as a substitute. Again the question here would be, does soya milk provide the same vitamins and nutrients that the normal baby milk provides? Well, the answer is obvious, no. So this shows that baby milk has actually very weak substitutes making it inelastic. Another test that can prove that baby milk is inelastic is to see the proportion of income spent on baby milk. So because of this, many business firms understand that when they increase the price of baby milk, they can increase their total revenue. This business strategy is a concept very simple for firms to use. Most firms are smart enough to realise that reducing prices for inelastic products will only mean that they will make less money. Since, prices of baby milk will not be going lower anytime soon, it is only logical that parents demand a price ceiling to be imposed.


What happens when a price ceiling is imposed? When a price ceiling is introduced to baby milk, the price will now be lower than the market equilibrium price. Any price higher than the price set is now deemed illegal. To the common people it all sounds like a dream come true. And their financial burden will now be eased. Will that really be the case? Let us look into the price ceiling deeper. In contrary to what people believe, a price ceiling actually causes negative effects. The first negative effect is that it would create a shortage of baby milk. This shortage of baby milk occurs because business firms are now not allowed to sell at any price higher than the price ceiling. Because of this, many firms are now not willing to sell baby milk at a large quantity at such a low price causing the quantity supplied to decrease. Subsequently, as firms are now supplying less baby milk than they should be, resources will not be utilised fully causing inefficiency.

           As quantity supplied continues to decrease, the quantity demanded will soon exceed it. And when demand is more than the supply, a shortage will occur. This actually means not everybody will be able to get baby milk at the level of the price ceiling. If the rich people were the one to buy all the baby milk at a cheap price first, then what would happen to the other middle and low income people? So in truth, this is actually unfair. And because the quantity supplied of baby milk is now in a shortage, people will spend more time in searching for baby milk. And when that happens, the opportunity cost of baby milk is increased. In this situation the opportunity cost involved is not only time but petrol and possibly phone calls as well which could be used more productively. In the end, the baby milk actually costs more than it when it was before the price ceiling is implemented.

               Also, when people are unable to purchase baby milk, feelings of frustration that will soon develop into desperation will exist. When people are desperate, they can be willing to do many things. Since a great demand for baby milk exists, black markets will not let such a great opportunity to make money go to waste. As a result, people will turn to black markets in order to get baby milk where they will be required to pay very high prices. In addition, if the price ceiling is set too low, the prices people have to pay for baby milk will be even higher. When that happens, the people end up worse off than they were before the price cap was set.

              Therefore I would like conclude that setting a price ceiling on baby milk will not be the best solution. Since baby milk is considered a financial burden, there are many other ways the government can use to help. The government can offer help in other areas financially to low and middle income earners so that the people will have more disposable income such as providing 100% exemption on housing loan stamp duty, providing free medical health check-ups at government hospitals and maybe even reduce taxes. In other words, offering other money incentives would be better options.
                                                                                                                 
                                                                                                              By Eugene Tan Jia Sheng

Minimum wage in Malaysia : Good or Bad?

            Earlier in the year 2012, the Prime Minister Najib, announced that a minimum wage will be set. The minimum wage will be set at RM800 to 1000 depending on the location. This will mean an increase from the current market minimum wage of RM760 which would be the current equilibrium price in economic terms. There are positive reviews and negative reviews to this.

             First of all, in my opinion wages of RM760 is not enough with the ever increasing cost of living today. Even a basic meal today in cheap hawker centres would cost a minimum of RM4.00 for a small plate of chicken rice. That is why we Malaysians like to complain in our native language “Semua naik, gaji tak naik” which means everything else in increasing except for salary. With the rising pressure from the increasing cost of living, if the government plans to just sit around and just watch, the citizens and labour unions might go into protest and rioting to demand for higher salaries. When that happens, peace and political stability in the country will be in jeopardy which would not benefit anybody.

                Besides that, with such a low salary of RM760, it would be understandable if the people would feel unmotivated to work or look for a job especially the younger generation. Therefore with the introduction of minimum wage at RM800-1000, it would be fair as many employers today provide unfair treatments towards employees who are paid with such low salaries as they are considered as cheap labour and easily replaceable. And from the perspective of employees, when they are paid with such low salaries for their hard work, they will not feel the need to improve and work harder as they already paid so low. With the minimum wage at RM800-1000, workers would want to work better to justify their pay and will be less likely to quit.

                Sure, setting minimum wages may sound fair when it does what it is intended to do. But, in reality it is not really that simple. This is because in theory, a minimum wage set to the market would mean government interference to the actual equilibrium wage level. When a minimum wage level above the equilibrium wage is set, a price floor will occur. And because of this price floor many effects will occur. The explanation is simple as when the wage rate is at equilibrium level, the quantity supplied for labour will equal the quantity demanded for labour. So, in this scenario, there is no such thing as a shortage or a surplus of labour.

              Put it in this way, when the wage rate is above the equilibrium wage, the quantity supplied for labour will exceed the quantity demanded. This is logical as, since the minimum wage is now set assuming at RM1000, many people will want to work as the pay is now attractive. But, how many employers can actually afford to pay a large number of workers at a salary of RM1000? That is why a surplus of labour will exist, which in this case would mean unemployment. Of course we mention that cost of living is increasing but this also applies to business firms where their cost of production is also increasing. In order to cut cost or minimize losses they will have to retrench excess workers as the minimum wage cap will actually increase their cost of production, hence the increased number of unemployed labour. In addition to that, the harsh truth is that equilibrium wage rate actually mostly applies to unskilled workers and also fresh graduates. Would it be justified for employers to pay such a high salary to employees who have qualifications of only completing SPM and have close to zero working experience? The obvious answer will be no. In fact, this actually only lowers the chance of unskilled workers or in this case SPM leavers to secure a job as now no employers would want handle such a cost of paying RM1000 to them. And also, if such unskilled labour were to receive such a high pay, what about the people with high qualifications and professionals? These highly qualified professionals would feel that they too deserve a higher pay if unskilled workers were to receive an increase in their salary. And this again in turn will pressure firms to pay their professionals a higher salary in order to keep them at the firm as through management concepts, we learnt that professionals are valuable assets and human capital to the firm increasing their cost of production again. In the end, who pays the price? The lower qualified and unskilled workers have to be retrenched in order to cut down on cost of production which again further increases unemployed labour. Also on a side note, if employers do not want to sacrifice their employees, they will pass the cost onto customers. Meaning that prices of goods and services will increase, creating more burden on the people.

             One of the best examples on effects of minimum wages on countries would be the United States. In the United States, because of the minimum wage set for unskilled workers, many students end up quitting school and do not want to further their studies anymore than high school because they find the minimum wage already sufficient to support their living and there is no point in actually continuing their studies to improve their skills and knowledge to become skilled workers.

                  In addition to that, inefficiency usage of resources will also occur. This is due to many workers in the market not being utilised because of the price floor implemented. The minimum wage set actually creates increased problems such as increased time spent on searching for jobs because not many firms will want to hire more employees if they have them a minimum wage of RM1000. In economics, we learnt that nothing is actually free and for everything we do there is an opportunity cost, which is the second best option, sacrificed in order for us to do what we want to do. So in this case it would increase the opportunity cost of people as they would spend more time in searching for jobs. Furthermore, since now that the number of employed labour is lesser than the efficient quantity, there will be a deadweight loss. In this case, the deadweight loss is created because firms now will not want to spend more for their own benefit by hiring more employees because of the increased cost.

                   As my conclusion, I would like to add that the intentions in implementing a minimum wage rate are good. But, it is easier said and done. There are the positive effects and the negative effects in doing so. Our leaders may have already taken everything into consideration and calculated all the risks or it could be just gimmick to get people to vote for them during the next general election. Only time will tell.

                                                                                                                       By Eugene Tan Jia Sheng

Prices of Green Hit Sky High

The citizens of Malaysia are facing hardships from high petrol prices, ridiculous taxes on automobiles, cigarettes, alcohol and etc. but it’s still not a big issue as people can still survive without all these goods. It becomes worst when a necessity becomes a factor, something human beings need every day to live on. According to an article I have read online at Asia One News, vegetable prices are starting to be of concern. Vegetables such as spinach and spring onions used to cost between rm4.00 to rm5.00per Kg , now they have increased to rm5.50 to rm6.50 per Kg. Traders which previously paid around RM 4 to RM 6 per Kg for Kailan are now panicking over the ridiculous increase to RM12 per Kg. It is believed that the prices will continue to soar and it’s going to bring misfortune to those of low and medium income groups which will have to pay more on food.

                There’s quite a few reasons that has led to the increase of vegetable prices, one of it is the failure of vegetable producers to meet the demand of consumers. Why have crops decreased in such a drastic number would be because of the unpredictable weather Malaysia is facing throughout the recent months and this has largely affected the growth of vegetables. A survey held at two wet markets, Stutong Community Market and Petanak Central Market identified that a large number of traders were troubled by the supply factor in view of the rainy season. For example would be tomatoes and cabbages, tomato trees produce very less fruit if it is exposed to too much rain water while cabbages are easily spoiled. This happens because most of the farmers in Malaysia still practice very traditional ways of agriculture where their crops are mostly out in the open without any roofing to avoid rain. These farmers would face huge losses while those farmers with well equipped land will prosper with the high prices. In this case, producers who face major losses because of low production are forced to find alternatives such as growing flowers (chrysanthemums) instead of vegetables, while some venture into tourism which is seen being done in Cameron Highlands where farmers convert their farms into tourist traps, selling their produce directly to tourist instead of shipping it to wholesalers. This will further increase vegetable prices and soon it will attract farmers who intend to take advantage of this opportunity by growing vegetables. Thus supply of vegetables might increase in the future pushing prices back to equilibrium. Flash floods were also one of the reasons vegetable produce is so low. Because of heavy rain, farms and plantations were flooded causing much destruction to crops. “With the rain and floods happening since December, it is hard for us to get supplies and the price had tripled,” said Chai who had been trading for more than 20 years.

                To make matters worse, farmers are not able to produce enough supplies because of labourer shortage. “The prices of fruit and vegetable will continue to soar because farms will not be able to produce enough crops due to the shortage of workers” This severe shortage of labourers happened due to the 6P foreign worker registration programme. A big increase of demand for workers occurred and farmers were seen competing over the workers still available such as attracting workers from other farms by offering higher pay. Such disloyalty of workers made a lot of farms to go out of business, decreasing vegetable supplies even more. The programme affected farms a lot because foreigners were the only working force available to farmers. Locals have no interest in working for farms because of low pay and the job is tiring. Many farmers were forced to operate with a skeleton crew and also working additional hours to meet demand because they had a hard time hiring forgein workers. It is because of the programme, many registered foreign workers are also opting for higher salaried jobs in the city. This problem has also led to more and more farmers to change from agriculture to tourism, where we see more and more stalls and hotels being built in Cameron Highlands instead of people growing crops. Federation of Malaysian Vegetable Growers secretary-general Chay Ee Mong warned  that if the problem of labour shortage was not resolved, farms would not be able to produce enough crops to meet population demands. Vegetable prices have increased also due to the decrease of imports from other countries such as China because of natural disasters.

                If prices continue to rise, consumers will find it hard to purchase food. Consumers might seek for alternatives such as mainly consuming meat or bread which will cause health of consumers to decrease. Even prices of dishes at restaurants would increase putting more burden on city dwellers who mostly dine outside. Sherson Lian, 26, a chef at a resort in Malacca, confirmed that if prices cease to decrease, they would have no other choice but to increase their rates. Furthermore, with the population increasing every day, such low supplies might not even be enough, causing scarcity of food which will lead to famine issues among the low income group. Consumer’s buying power will also be affected, restricting them to spend more on other necessities which in turn affect other businesses. However, it is believed that prices will go back to normal when weather is much better , and producers are able to supply according to the demand. Philip Chin, a trader at Petanak Central Market said the price hike is expected to end after the Chinese New Year. But farmers are still urging the government to lift the ban on workers from Bangladesh and to review a regulation on reducing the number of foreign workers from 2.5 million to 1.8 million. Without enough workers, producers are still finding it hard to achieve the demand of consumers.


                                                                                                                 By: Jonathan Chong

Ridiculous Taxes on Alcohol

           Alcoholic beverages have existed in all cultures through most of their recorded history. It is believed to bring negative consequences when it comes to drinking  but we are to consider their potential for positive, culturally adaptive mechanisms. For example such as in Malaysia, it is a Chinese tradition for the host of a celebration( weddings, house warming & etc.) to provide guests with alcoholic beverages where they sit together to feast and drink, this is where the infamous term "yam seng"(Cantonese word for drink) came to be very popular among all races in Malaysia. Drinking is a way for people to gather together and also acts as entertainment. Western culture of drinking in bars after a long day of work has essentially influenced eastern culture as well where more and more Malaysians are seen ordering pints of beer in pubs and bars all around KL. Ever since, alcoholic beverages have been in increasing demand.

            Based on an article i have read online from The Edge Malaysia, "The government (of Malaysia) in the past 10 years has moved taxes (on alcoholic beverages) from one of the lowest in the world to one of the highest,"said Guinness Anchor Bhd's(GAB) managing director Charles Ireland. Fellow Malaysians welcomed the tax increase with distaste because of the rise in prices of alcoholic beverages as well. Carlsberg Brewery Malaysia Bhd managing director Soren Ravn stated that breweries in Malaysia agreed to increase beer and stout prices by an average of 3.6% to pass on the higher input costs to consumers. With such increase, it has added more weight to the financial burden of those with low and middle income. Consumers unsatisfied with the taxing and price increase stated that they already pay enormous amounts of duties and taxes on every glass of alcoholic beverages consumed and feel it's unjustified and very expensive compared to any other country, also stating that Malaysia has the second highest duty on beers in the world just after Norway which has higher income of 8 to 9 times compared to the income of Malaysia.

           Although Malaysians continue to present their distaste towards the price increase of alcoholic beverages, yet the demand for it does not decrease but instead increases still. According to the World Health Organization(WHO), Malaysia is the world's 10th largest consumer of alcohol despite being a small country consisting of a small population; with beer consumption up to 11 litres per capita. This shows that alcoholic beverages are non-elastic goods. That is why breweries were bold enough to pass on taxes to the consumers without worrying about the decrease in demand and at the same time increasing revenues for the breweries and the government while consumers suffer the cost.

While prices continue increasing but not the salaries of consumers, it is possible that they might try to find substitutes to alcoholic beverages or even spend less on something else to cover for their alcohol expenses. Consumers might spend less on healthy food , health supplements, or even medication. This in turn will increase health problems in the country which Malaysia is already facing. To some extent, some Malaysians drink cheap and dangerous backyard brews and compounded hard liquors(CHL) because they have been priced-out of the market for being safe alcohol. Most local producers don’t practice safety standards or quality checks which have cause consumers to face various liver-related illnesses. Because of the taxes and prices increasing all the time, a black market is introduced containing more and more smuggled alcoholic products and beverages which are sold a lot lower than the actual market price. Counterfeit liquor is also among the problems occurring due to the price increase of alcohol where these illegal producers are making millions .According to Stars, fake liquor is pouring into the country with naïve consumers drinking adulterated spirits and assuming that they had a good bargain because it was sold way below the market prices. The increase of alcohol prices is also one of the reason crime rates are getting worst with bar tenders serving customers with the so-called ‘genuine ‘ whiskeys and beers and also circulating in Chinese medicinal halls and mini markets. Ireland believes that increase of taxes does not discourage people to consume less , but encourages them to change the form of alcohol they consume, consumers will seek for contraband or smuggled beer or shift to hard liquor with same alcohol content for a lower price per unit. Ireland also quotes “it will encourage the black economy of smuggling, and government revenue would go down rather than go up. This would have a negative impact on the economy overall when you take into account the lower excise collections, lower employment, lower number of tourist arrivals.” Malaysia is said to rank among the top five countries affected by the problem of counterfeit liquor . Evident that demand for such counterfeit supply is also very high. In some cases, people use drugs as a substitute to alcohol(ecstasy,aramin) because these drugs provide intoxication at a very much better value-for-money.

Tourism which plays a big role in Malaysia’s economy is also affected by alcohol prices where tourists avoid coming to Malaysia because of the incredibly high prices of alcohol. For example in Langkawi, taxes are exempted for all alcoholic beverages, it has helped boost its reputation as a tourist hot-spot where people travel miles just to enjoy a holiday there with lots of affordable liquor and sandy beaches. The government is actually facing a tradeoff and are facing more loss than gain.The government thinks that raising alcohol taxes will limit people from drinking as well as improving health but in reality it’s actually doing more harm than preventing it. If that was really the government’s intention then they should cease to increase alcohol taxes, instead they should try educating the people with more campaigns against abusive drinking. They shouldn’t increase prices resulting more harm such as increasing smuggling, fake liquor production which is unhealthy, making the people suffer financially and putting the country’s tourism at risk.


                                                                                                         
                                                                                                          By: Jonathan Chong

Demand for old bungalows in Petaling Jaya

Recently, Petaling Jaya has been a popular talk among house buyers or investors due to the high request on old bungalows which are used for each buyer’s own purposes based on a written article entitled “Values of old bungalows in PJ hold steady” that is published in The Edge Malaysia, September 10, 2012. The demand of old bungalows is increasing every year due to its city’s prestigious status as well as the convenience of the city to highways and well-built infrastructure. Stated by CB Richard Ellis Malaysia associate director Wong Tack Loong, “The average selling price for the old bungalows are between RM 1 million and RM 3 million, depending on the size land area, terrain, type, tenure and condition of old building.”  Despite its high-priced factor, there is still a huge demand for old bungalows. But, what makes it so appealing to the buyers?

In 2003, there are 503 of old bungalows sold and increased to 959 in 2008 although the sales in the next year dropped, it managed to increase to 946 transactions in the year 2010 and it is still increasing to this very year based on the data collected by Zerin Properties. This only proves that the demand for old bungalows in Petaling Jaya are increasing each year, thus causing the property price to increase. Percentage of quantity demanded by buyers of the old bungalows are higher than the percentage increase in price. This is why there is no standard figure as prices for each old bungalow varies. For example, in Jalan Kemajuan, a house along the main road that was valued at RM230 psf can be transacted up to RM 400 psf. Each old bungalow is well dependent on its location and purposes when it comes to the price of the bungalow.

           

Each purchaser has their own personal needs for each bungalows for example some of the old bungalows especially the ones facing the main road are used for commercial use such as boutique or a showroom and some of this outlets charged at a higher price depends on renovation done as well as its location. Some of these outlets range from RM 10,000 and RM 15,000, or from RM 3 psf onwards. Some of the owners prefer to tear down existing building to build a new building on the land and sell it on the secondary market or rent it out to those that are interested to gain profits. But majority of them are looking for residential purposes instead. This is because of the large land size which most of them prefer to tear it down to build a bigger home. Furthermore, its ample amenities, low density and exposed to a lot of greenery make it more appealing to homebuyers to re-create their ‘home sweet home’.

The one obvious change from our ancestors generation that can be observed today is that quality of lifestyle for people have improved. People from the low and middle income group today can afford far more things than those from back then. Actually in truth, the spending power for these groups of people today are increasing. The middle income group today can even afford to buy a decent sized home and pamper themselves to luxuries once in a while as compared to people a decade ago. Furthermore, the population of this generation has increased and more and more people are searching for the perfect land to invest on and the old bungalows in Petaling Jaya satisfy most of the requirements thus the demand of the old bungalows are high. Another factor that affects the price rate is the number of years left on the lease. Bungalows that still consist of 60 years to go and because it still has its commercial value can go for RM300 to RM350 psf while the average Section 5 house is going for RM200 psf. But, there is market equilibrium as the price of the old bungalows balanced the needs of buyers and sellers.

The Selangor government also approved the renewal of leases up to 99 years at very affordable rates and payment terms which is called “Private Residential Ownership”. This which established last year allow the landowners of residential properties to renew land leases at a sum of RM1000 instead of the high premium price based on current market rate with a condition that owner must remained on the property itself. Moreover, in the recent Budget 2013, one of the incentives are to enable more Malaysian to own their very first residential property called the ‘My First Home Scheme’, which was launched under the previous Budget, will be improved by increasing the income limit for individual loans from RM3,000 to RM5,000 per month or joint loans of husband and wife of up to RM10,000 per month. More buyers especially the newlyweds that are looking for a place to start a family will be able to afford a better land for residential purposes therefore eyeing on the potential old bungalows that are available in the market.

 Nevertheless, there will always be a high demand for the old bungalows in Petaling Jaya regardless of each buyer’s purposes. Based on the high request of the old bungalows, it will reach a period where there is shortage. In economic terms, when there is a shortage, this will be an increase in demand and the demand curve will shift rightward which also causes the price to increase along the supply curve. Real estate agent and property consultant Nixon Paul, director of Carey Real Estate SdnBhd stated that it is difficult to buy anything under RM2 million, which is generally the asking price depending on the land size and condition of the house. Due to the city’s abundant benefits, there are no wonders that buyers find the old bungalows in Petaling Jaya captivating. In my opinion, the values of old bungalows are most likely to hold strong in the future as there will eventually be a short supply of old bungalows with substantial land areas.
                                                                                               By Chuah Yean Yean

 

Should excise duty on cars be reduced? (under Budget 2013)

Based on the article written in The Edge Malaysia, 24-30 September 2012 entitled “Quiet automotive shake-up”, in the upcoming Budget 2013, there might be a cut in excise duty for vehicles. Before I start, I would like to add a brief introduction on the automobile industry. The world of automotive industry has been a top notch compared to other industry. In Malaysia today, everyone is in need of their own transportation due to the country’s inadequate public transport not to mention the question of safety as crime rates have seen to increase dramatically over the years.  But due to the highly taxed levied on automotive vehicles, a lot of consumers are faced with one big problem; car loans. This has been such an issue to the country and the leaders of this country are not pleased with this therefore resulting in another shift categorized under Budget 2013. 

 Prime Minister Datuk Seri Najib highly supported the statement as he mentioned that car loans are one of the major causes of the bankruptcy and contributes 25% over other loans spectra. Due to this, there has been a decrease in sales as consumers are waiting for the budget to be established. The government is now under pressure to decide whether or not excise duty is to be reduced for the best of both buyers and automotive industry as well as the economy of this country not to mention, opposition coalition has declared that if they are able to win the election, there might be a cut in car prices. Therefore, resulting in consumers procrastinate in purchasing cars as there are expecting a reduction in car taxes leading to even more slowdown in car sales.

With the current situation of excise duty being charged over 75% to 105% to the consumers, the consumers have to face such a great burden that most of the major group especially those with lower incomes are forced to look into alternatives like second hand cars or cars that have a lower standard of safety due to the affordability. A bigger family group will cut its cost and purchase a smaller car due to a lower price and neglect the safety of the family members. In economic term, this is what is known as ‘substitution effect’ where quantity demanded for new local cars tend to decrease as consumers will seek for substitutes available. Quoted from an article from The Malaysian Times, “if a person buys a car he has to pay 36 times of his monthly income which is very burdening”. Consumers have to strive for each ringgit he can earn to pay his car loan as well as other household loans. Now, the purpose of this deal is that not only does it help to loosen the burden of car dealers; it might turn out to be a good turnover for the economy of this country.

On the other side of the same coin, there is also a lot of concern regarding the abolishment of excise duty. One of them is Datuk Seri Mohd Khamil Jamil, DRB-Hicom Bhd group managing director. He states that lowering the tax might create another uncertainty and should be taken into account both local automotive companies and foreign investors. Furthermore, he also mentioned that this might also result in incentivized reduction. Many have seen to argue that a cut in excise duty will bring a drastic change to the automotive industry and this might possibly last for years.

The downside of this deal is that the reduction in car tax might result in national cars facing a higher competition against non-national cars as non-national cars are cheaper and have easier access to the country resulting in decrease of sales of national cars. As the price of national cars are higher than cars that are manufactured overseas, the will be a change in supply. The rise in price of cars due to the excise duty charged will lead to supply curve shifting rightward as the demand for the sales in local cars decreases causing a decrease in supply and quantity of national cars. If there is a big decrease in sales, this might even lead to workers facing unemployment as consumers have a higher demand for better car facilities that is of a cheaper price. A cut in excise duty will only result in consumers upgrading their cars and not purchasing more cars. In the end of the day, sales of car especially national cars will eventually drop.

According to Perodua managing director Datuk Aminah Rashid Salleh, owners from a low to middle income that have nine year loans might face a bad turnover rate over the five years. This could only mean that those that are still paying for the loans might lose out since their cars will depreciated if the excise duty is to be abolished. “ If there is accelerated depreciation of used vehicles from a possible reduction in new vehicle prices, bankers need to consider their collateral value”. Bankers can raise interest rates or lower the loan-to-value ratio and this might turn out to be a negative outcome for new vehicles sales. These whole inter-related consequences only prove that an abolishment in excise duty might not be a good idea after all.

Such a move will bring in more disadvantages than its advantages because it only help a small aspect of the issue which is to reduce burden of household loans of each consumer in this country. The government should look into other perspective in engaging a proper solution to solve this issue rather than abolishing the excise duty which in return increases the sales of foreign cars and not our local cars.

Nevertheless, a proper and well-thought plan in scheduling the reduction in excise duties should be done before it is published under Budget 2013. I strongly believe that more research on statistics test on this issue is to be made so that it is done equally fair to the automotive industry as well as the consumers and the best of all the parties that are involved in this industry.
      
                                                                                               By Chuah Yean Yean

Price Ceilings on Sky-rocketing Rents. A Double-edged Sword?

In a recent article, rents was said to have already peaked by 4.3% over the past year and probably will increase even more for the reason of “scarcity” of mortgage finances and good quality properties running short. Insufficient mortgage finances and the high rate of deposits required by lenders are barriers to homeownerships and have to be brought to attention in hand with the shortage of further supplies coming into the market. The result of the upward-driving rents has made the would-be buyers to be trapped in the rental sector, disabling them to raise a deposit nor be able to meet the lenders’ mortgage requirements. Suggestions of why people chose to rent rather than owning a property was that the surrounding housing market is uncertain.

            Homeownerships are somehow income elastic, i.e. a rise in the price with other things remaining the same will cause a decrease in the quantity demanded and the movement up along the demand curve. The law of demand states that the higher the price of a good, the smaller is the quantity demanded (ceteris paribus) and vice versa. Therefore, rent is the substitution or rather, next best choice to buying homes. The substitution effect is that when the relative price, or known as the opportunity cost, of a good or service rises, people seek substitutes for it. So the quantity demanded of the actual good or service will drop. Whilst the other result of the law of demand is the income effect. When the price of a good or service rises relative to income, people cannot afford all the things they previously bought or want-to-buys. So the quantity demanded of the good or service will lessen.

            Recently, rents have been said that it should be expected to raise between 50 to 200 percent. Tenants who have unpredictable profits were troubled by this. Rent demands which are expected to hike (and naturally the price of rents will follow) did not move the income to increase. Wages and salaries was not seen to have keep up the pace but property business people have seen to be heartless when it comes to not able  to bring its profit to the maximum level. Therefore, people are trapped in neither affording to own a home nor renting.

            Prima facie a price ceiling on rents should be placed, i.e. the intervention of the government in regulating the price (a.k.a. rent ceiling) so that it is illegal to charge a price higher than a specified level.This suggestion is mainly that if there is no control over the prices of renting, the middle-lower or even, the middle-upper class would encounter homelessness, or face greater financial threat. Other social issues such as the psychological health of individuals of the country, or other external factors (which would then be a macroeconomics concern) would rise. However, rent ceilings are somehow a double-edged sword. If a rent ceiling is set above the equilibrium rent (price which the tenant is willing to give and the landlord is willing to exchange his property for), there is no effect and the market works as if there were no ceiling. On the other hand, if the rent ceiling is set below the equilibrium rent, it might cause a housing shortage. Landlords will be reluctant in supplying spaces to rent and therefore worsen the situation as compared to the effort in trying to sell houses. In explanation, when there is a problem in the demand in the house-buying market, people still can rent spaces to solve the problem of having a roof on top of their heads. And this will lead to some other who is able to afford to buy houses, to buy houses. Here, the demand is slow, but it is still a moving market. However, if even the rent prices are so high that it is no longer affordable for the lower income society, they might have to flee their shelter rented because landlords are more willing to let the spaces to be empty than to rent out by the price lower than what they have set in mind.

            Besides that, three apparent issues will arise if there were to be a price ceiling below the equilibrium is set. A rent ceiling will decrease the quantity of housing supplied to less than the efficient quantity. This will cause a rise to the deadweight loss, producer and consumer surplus shrink, and there is a potential loss from the increase search activity. An “increased search activity” is the time spent on looking for someone who is able and willing to do business with.  When a price is regulated and there is a shortage, this will increase. Search activities are costly and the opportunity cost of housing is the same as the regulated rent in addition to the opportunity cost of the unregulated search activity. The reason to this is that the quantity of housing is less than the quantity in an unregulated market, and the opportunity cost of housing will deem to exceed the unregulated rent. Moreover, there will be an inefficient underproduction of housing services. The marginal social benefit from housing services is deem to exceed its marginal social cost and a deadweight loss will arise. The next issue is the existence of black market, i.e. an illegal market which operates alongside a legal market in which a price ceiling or other restriction has been imposed. Illegal arrangements are made between renters and landlords at rents above the rent ceiling, generally, would have been an unregulated market. Therefore, according to the fair rules view , rent ceiling is unfair because it barricades the voluntary exchange in the market and it generally does not benefit the poor. Therefore it is submitted that it will be a factor of the housing quantity decrease and the scarce housing is allocated by either lottery, first-come-first-served or discrimination.

            All in all, an alternative yet effective solution to this problem is yet to be discovered but in the meantime, a short-term-slightly-below the equilibrium rent might do the favor. 
                     
                                                                                                      - by: Chong Ai Sim (1101F12341)