Subsidy on Sugar

    Subsidies had been imposed on sugar price by the Malaysian government since 2009 due to a hike in global raw sugar prices (CIMB, 2013). It is defined as the payment made by the government to producers which help to not only lessen the burden for local consumers, but also decreasing producers’ costs or provide incentives to encourage production. On 29 September 2012, the subsidy imposed by Malaysian government in Budget 2013 is RM0.34 per kilogramme of sugar (CIMB, 2013). 

Looking at Diagram 2(a), it illustrates that when there is no subsidy, the demand curve, D intersects with the supply curve, S determined the equilibrium price at P₀ and equilibrium quantity of sugar is at Q_0. When the subsidy of RM0.34 was introduced by government, first, it shifts the supply curve, S to S+Subsidy. Next, it lowers the price of sugar to P₁ and increases the quantity at Q₁ (Parkin,2014) .

Subsidy results in inefficient overproduction. At the new equilibrium quantity with subsidy, marginal social benefit reduced to the same level as the market price. Hence, Marginal Social Cost, MSC increased and it exceeds Marginal Social Benefit, MSB. This indicates that Central Sugars Refinery willing to produce more than the number of consumers willing and able to purchase. This then leads to inefficient overproduction of sugar. Looking at the Diagram 2(a) too, we can see that the gap between MSC and MSB indicates the amount of subsidy paid by government and it is absorbed by both consumer and producer. The yellow shaded area indicates the subsidy that is absorbed by consumer while the blue shaded area is received by producer (Parkins, 2014).

Domestic Trade and Consumer Affairs ,Datuk Hassan Malek

Domestic Trade and Consumer Affairs, Datuk Hasan Malek hinted that subsidy for sugar may be slash down, which will be announced in Budget 2014 on 25 October 2013. The reason behind of preparing this budget scheme is to help boost the nation’s economy, specifically to reduce the fiscal deficit (The Malaysian Insider, 2013). Back to the price of sugar, it will increase when subsidy is cut down. This will result in a decline in quantity produced as well. Reason because the incentives received from government had been reduced, hence, cost of production from Central Sugars Refinery increase.