ACKNOWLEDGEMENT

We would like to express our special gratitude and thanks to the Assoc.Prof.Sr.Hajjah Zaiton Main, Lecturer Economics (EMT 415), Universiti Teknologi Mara (UiTM), Shah Alam for her guidance and constatnt advice as well as for providing necessary information regarding the research and also for her support in completing this task possible.

We are also would like to express our herefelt thanks to our beloved parents for their blessings, and classmates for their help and for the succesful completion of this task.

Finally, yet importantly would like to thankful to all the first semester students of AP225 who have given the support, all friends that were supporting all the way to complete this task and to those who directly or indirectly in completing this task.

1.0INTRODUCTION

1.1 MIXED ECONOMY IN DEMOCRATIC COUNTRIES

An economic system is a way of organizing the relationship among individuals, firms and government agencies on how to make choices when confronted with basic economic questions. One of them is mixed economy. This is an economic system which combines both capitalism and socialism to solve basic economics problem. A mixed economy in an economy both the public and private sectors play a role in the economy.

In real world, most of the countries practice mixed economy such as Asia (Malaysia, Singapore, Thailand, Indonesia, India, Pakistanand South Korea), Western Europe (Sweden, Norway, Spain, Germany and France) and South Africa. Since there are limited resources, a nation or society has to decide how to allocate its limited resources efficiently to produce goods and services to satisfy the need of the people. To do this, three fundamental economic questions need to be answered. Thus, an economic decision is made based on the characteristics of mixed economy system.

1.2

How the mixed economy system solve basic economic problems :

a) What to produce In mixed economies, the question of what to produce is decided by both the public and private sectors. The goods produced and services provided depend on the consideration of social welfare and economic growth.

b) How to produce
2

The public and private sectors will decide on the techniques of production to be used in the production of different goods and services; choose the best method labour or machine.

c) For whom to produce The distribution of goods and services is also decided by the public and private sector. The mechanism does not fully function in mixed economies. In many mixed economies, the government intervenes directly through price controls and indirectly through imposition of indirect taxes and subsidies.

1.3

Characteristics of a mixed economy :

a) Public and Private ownership of resources The private and public sectors play important roles in a mixed economy. Private enterprise conduct business freely and the government encourages the private sector by providing the infrastructures and facilities.

b) Price mechanism and economic plans in making decisions The price mechanism is used to price both goods and services. However, commodities such as sugar, oil and rice are declared as controlled items in Malaysia and the government fixes their prices. Most of mixed economies accept economic planning as an instrument of economic growth and social justice.

c) Government helps to control income disparity In most mixed economies, the government controls income disparity through income taxes and welfare payments. The government also has direct control over profits, wages and rents. Thus, the government helps to narrow the income gap between the poor and rich people.

d) Government intervention in the economy The government will not intervene in the economy except for particular industries. In a mixed economy, the government uses legislation for unsafe goods categorized as illegal products such as military items. The government also uses direct provision, for example, education, defence and health to increase the standard of living. The government will carry out certain project or produce certain goods that the private sector consider unprofitable. For example, low cost housing project in Malaysia are administered by the government and cater to the lower income group. This project is not profitable venture for private enterprise.

e) Co-operation between the government, public and business sectors. In mixed economies, there is significant co-operation between the public and private sectors leading to economic development.

f) Government control of monopolies. Monopolists are single players in an industry. They have complete, sole control over the price of goods or services. In order to avoid customers being exploited by monopolists, the government will regulate the power of monopolists

1.4

Advantages of Mixed Economy

The economic structure of a nation is a very important factor in the progress of the country. While in some countries, the economic structure is completely controlled by the government; the private organizations or the market force is the deciding factor in the economy of some countries. However, in mixed economy, both the government and the private sector jointly control the economic structure. There are numerous advantages of a mixed economy.

i.

Provides fair competition

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The presence of private enterprise ensures that there is fair competition in the market, and the quality of products and services are not compromised.

ii.

Market prices are well regulated The government with its regulatory bodies ensure that the market price do not go beyond its actual price.

iii.

Optimum utilization of national resources In a mixed economy, the resources are utilized efficiently as both government and private enterprises are utilizing them.

iv.

People are given more power The general people have more say when it comes to the quality and the prices of products and services.

v.

It does not allow monopoly at all Barring a few sectors, a mixed economy does not allow any monopoly as both government and private enterprises enter every sector for business.

1.5

Disadvantages of Mixed Economy

The disadvantages of a mixed economy really depend on how "mixed" it is. For instance, if it is mixed more towards a free-market, there is little regulation (some may see this as a good, though), but if it is mixed more towards a command economy, the control may stifle growth. Mixed economies can also have different characteristics. For instance, mixed economy A
5

maybe high tax low regulation while mixed economy B might be low tax and high regulation. Each of these will share a different set of disadvantages. A will stifle profits due to it's high tax structure, but will encourage new ideas due to its low regulation (this could result in many weird effects such as an economy comprised almost solely of small, well-niched businesses). B will encourage profits, but due to its regulation, some new ideas (and some growth) will be stifled. For instance, if environmental regulations are strict, the building of new plants or refineries might be lowered. This could result in a small number of very large and profitable businesses. The key is to find a balance amongst the many facets of economies (mixed economies are not limited to the two dimensions mentioned in this answer - regulation and taxes. There are many many more ways to fashion a market structure) the both encourages growth and supports the beliefs of the populace that are governed by it. There are numerous disadvantages of mixed economy system are the following:

i.

It's efficiency property reduces in progressively higher degree, the more its mixed nature embraces more and more of government / state intervention and State planning and reduces the reliance on competitive market economy management mechanisms.

ii.

Mixed economy system has a natural tendency to move further and further away from reliance on competitive market mechanism to greater and greater bureaucratic controls and interventions until the system efficiency goes down to zero and the system breaks down or dictatorships get fairly established to hide inefficiencies and remove all economic and political freedom from the citizens.

iii.

Mixed economy systems tend to encourage more state monopolies, higher and higher tax to GDP ratio and dominant public finances, making the Govt. the overwhelmingly large economic player as compared to corporate or individual entities.

iv.

Mixed economic systems often turn into closed economies hindering international trade and globalization and depriving citizens from he benefits of an interdependent world economies.

v.

Mixed economic systems incentivises corruption and political-bureacracy-capitalist nexus enjoying at the cost of the citizens.
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vi.

Mixed economic systems delivers neither efficiency goals achievable through competitive market system nor do they bring about fast reduction in poverty incidence and socialistic societies People can't make their own decisions.

2.0 GOVERNMENT INTERVENTION IN THE MARKET

In Capitalism, there is no goverment intervention but in mixed economy system, there is government intervention. So, we will focus what is meant by government intervention in the market and how to their plays its role in the market equilibrium. Price mechanism is ppracticd in mixed economy, which means the prices are determined through the forces of demand and supply. But now, we have to deal with the external intervention in the free market that can change the equilibrium priceand quantity.

There are several types of government intervention in the market. There are fixing higher limit or lower limit on prices in certain markets and imposition of taxes and subsidies for certain items. These type of government interventions will cause the demand curve, supply curve or both curves to shift. Sometimes the government interventions in the market by fixing the prices can cause shortage or surpluses due to differences in quantity suppplied and quantity demanded.

Government control and fixes prices for certain goods and services, example sugar, rice, cooking oil, cement, steel bar and others. Governments determines the price and not the price mechanism. Basically there are two types of price control : price ceiling and price floor.

2.1

Price Ceiling or Maximum Price

Price ceiling is legally established price that is not allowed to increase above a maximum level set by the government. Price ceiling is also called maximum price. When the government feels that high price of essential goods such as rice is likely to affect the lower income group, the price ceiling will be imposed. For example, the price of sugar is fixed at RM1.45 per kg, the sellers can sell the product below RM1.45 per kg but not more than that. . Besides the essential goods, government also imposes rent control for houses or apartments. Rent control is a price ceiling applied to the monthly price for rental housing or
8

apartments, which is below the equilibrium level. This is because rental for housing or apartments normally takes large portion of everyones budget especially for the lower income group. This regulation is to help the lower income group to get rental houses at affordable price. Many countries in their major cities such as United States, China and others practice rent control.

As shown in Figure 2.1 below, fixing the price below the equilibrium level creates an excess in demand or shortage. A shortage results because the quantity demanded is more than quantity supplied.

Price

Price ceiling / maximum price

Shortage

Quantity

Figure 2.1 : Fixing the price below the equilibrium level creates an excess in demand or shortage.

In Malaysia, government control the price of low-cost houses, the price of low-cost houses is kept at RM42000 that is below the market price. Government also imposes ceiling price on food items such as the price of cooking oil, wheat flour, white bread and condensed milk, and for construction materials. Government also imposes price ceiling for petrol, diesel and LPG as well as cooking gas. These prices are set below the equilibrium price and sellers are not allowed to increase the prices for these items.

For example, Figure 2.2 shows the efficient outcome in the price of low-cost houses in Malaysia. The equilibrium price and quantity for low cost houses are RM60 000 and RM300 000 units respectively. The price ceiling for the low cost houses is fixed below the equilibrium price at RM42 000 per unit. As a result, the quantity supplied drops to 200 000 unit. As a result, the quantity supplied drops to 200 000 units and quantity demanded rise to 400 000 units. The excess demand over supply creates shortages of 200 000 units.

Price of low cost house (RM) 100 000 SS

60 000 40 000 20 000 DD 200 Quantity (10 unit) 400

Figure 2.2 : The efficient outcome in the price of low-cost houses in Malaysia.

2.2

Price Floor or Minimum Price

The effect of a price floor is opposite to pric ceiling. A price floor is legally established price set by the government at a level above the equilibrium price in a free market. This price is not allowed to decrease below a minimum level set by the government but sellers are allowed to sell at a price higher than the minimum level. Price floor is also known as minimum price. The governement practices price floor commonly in the agriculture sectors. The price control is to protect the farmers income if the prices of commodities are too low

10

under the free market. For example, government controls the price of wheat to help poor farmer to increase their income with higher price.

Besides the agricultural products, the price floor is also imposed on wag rate in most countries. A price floor on wage rate is called minimum wage rate. Minimum wage rate is the lowest wage paid to the worker to protect them from employers exploitation. In Malaysia, government recently introduced the minimum wage rate for the rubber tappers or estate workers.

The minimum wage rate will reduce the number of unskilled labours demanded in market. This is because the minimum wage rate is higher than the equilibrium wage rate in free market. So the firms will hire less unskilled labours if the wage rate is high. On the supply side, higher wage rate will encourage more labours to be hired and low wage rate will discourage them to work. Therefore as wage increases the quantity supply of unskilled labour will increase. As a result there will be an excess supply of unskilled labours in the market, which could create surplus. So, excess supply would cause unemployment for low skilled labours.

This can be shown in Figure 2.3. Let us say the market is set to be free and have freedom to bargain. The prices will be adjust so that the equilibrium wage rate is achieved at We equilibrium quantity of labour will reach at Le. Suppose the government interferes in the market by setting the minimum wage rate at Wm. The number of labours willing to offer their service will increase and there will be upward movement in supply curve that will increase the quantity supplied to L2. However, at wage rate of Wm, the firms will hire less labours at L1. This is because firms can substitute the low skilled labours with machines of foreign workers with lower wage rate. As a result at Wm, a shortage exists where number of labours supplied is more than number of labours demanded in the market as shown in Figure 2.3.

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Wage rate Surplus Wm We Eo SS

DD L1 of labour Le L2 Quantity

The figure illustrates the minimum wages rate imposed in labor market. At the equilibrium, the wage rate is We and total labors are L When the minimum wage . rate is imposed above the equilibrium wage at Wm , the supply of labor increases to L and demand for labor by firms drops to L1 as a result of high wage rate. At Wm, there is excess supply over demand that creates surplus of labours.

Figure 2.3 : Excess supply of unskilled labours in the market .

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2.2.1 CASE STUDY

A Minimum Wage Scheme Will Benefit Many

The call by the Malaysian Trades Union Congress (MTUC) for a minimum wages scheme (MWS) should be looked into seriously by the Government, as workers in the lower categories are much affected by the increased cost of living and inflation. The Government needs to consider the various factors and changes that make an MWS feasible and necessary for the continued industrial and economic growth of the country. Since the 90s, due to vast technological innovations and changes, most of the industries have automated or mechanised their manufacturing and production processes, leading to employers needing only minimum workers. Wages now form a smaller portion of production costs, unlike before. Only the agriculture sector is labour intensive, and here the sky-high prices of commodities makes an MWS feasible. Considering the high cost of living and other related factors, the minimum wage for workers should be RM1,000 per month, compared with the present RM600-RM700 per month. This subsistence level of wages has placed large number of workers in urban poverty, unable to educate their children sufficiently for better prospects. The Governments agreement to an MWS will be the best affirmative action for all. The lack of an MWS has also led to the large-scale employment of foreigners in areas where locals could be used, such as shops,SMEs,transports service, etc. Many locals have also turned to self-employment instead of working for low wages. An MWS could release a few thousand of these locals into various industries and reduce the need for foreigners. Whereas large firms and multinationals offer attractive pay schemes in line with international standards, this is not the case with SMEs, which make up about 90% of local industries. Malaysia has a per capita income of RM40,000 per annum but lower-end workers can hardly expect a quarter of this amount. The Government also needs to consider creating a viable social security system or a welfare state to help low-paid workers, retirees, the retrenched, the unemployed, single parents, the widowed,etc. The MTUC too should not opt for a confrontationist stance with the Government, as any MWS can only become a success with the support and cooperation of the Government.

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2.3

Difference between price ceiling and price floor.

Price ceiling of Maximum price Price Price is set below the equilibrium price and is not allowed to rise. Market condition Advantages Shortage Consumer could purchase goods and services at lower prices.

Price Floor or Minimum Price Price is set above the equilibrium price and is not allowed to drop. Surplus Higher wage rate help the unskilled labour to get higher and stable income. Floor price protects producers income especially the farmers.

Emergence of balck market. Produce produces lower quantity. Disadvantages Producers tend to receive illegal payments from consumers.

Consumers pay more than the equilibrium price.

Surplus of production lead to waste of resources for government. Minimum wage rate leads to unemployment.

Table 2.1 : Difference between price ceiling and price floor.

2.4

Impact of tax

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In this section, we are going to look at another type of government intervention: taxes and subsidies. For certain products, government imposes taxes in the form of indirect tax. In some other products, the government provides subsidies. Both the taxes and subsidies have an effect on the equilibrium price and quantity in the market.

2.4.1

Taxes and equilibrium in market

Indirect tax is a tax imposed by government on producers or sellers but paid by or passed to the end-users (consumers). Indirect taxes consists of import duties, excise duites, sales tax, service tax and export duties. These taxes are revenue for the government. Some of the taxes are imposed on the seller that led to increase in the price and discourage the consumers to use the product. For example, higher taxes are imposed on cigarrete to discourage its usage. We will discuss on the effct of tax on cigarettes.

Basically, there are two types of taxes : Ad valorem tax and specific tax. Ad valorem tax is based on the percentage of tax. Whereas, specific tax is based on the quantity sold. To simplify, we will analyze the impact of specific tax of RM2.00 per back of cigarettes.

Figure 2.4 shows the equilibrium in a market with demand curve, DD and SS0 the initial supply curve. Before tax, the equilibrium price and the equilibrium quantity is RM7.50 per pack of cigarettes isimposed on cigarettes. Thereis no change in demand, but movement along the demand curve takes place. The supply curve shift to left as tax would increse the cost of production and thus reduce the supply of cigarettes. The new equilibrium occurs when new supply curve, SS1 intersects with demand curve, DD at prive of RM8.50 per pack and quantity of 200 packs. The buyer had to buy at a higher price of RM8.50 after the tax. Whereas the price the seller received is RM6.50 after the tax is imposed. The difference between the buyers price and sellers price is the amount of tax, RM8.50 RM6.50 = RM2.00 per pack. So, the upper portion (A) above the initial equilibrium is the consumers portion and lower part (B) is the producers portion of tax. Figure 2.4 illustrates how the tax amount of RM2.00 is shared equally between buyer and seller. The government revenue is the portion of A and B as shown in Figure 2.4.

15

Price of cigarette (RM) SS SS 8.50 E E

7.50 Consumers portion 6.50 Producers portion

DD Quantity (Packs) 200 300

The initial equilibrium price and quantity is RM7.50 per pack and 300 packs of cigarettes, respectively. The imposition of excise tax of RM2.00 per pack has decreased the supply since it would increase cost of production. Supply curve shift to left from SS 0 to SS 1 and equilibrium price rises to RM 8.50 per pack while quantity falls to 200 packs. The price the buyer pays is RM8.50 and the price the seller receives is RM6.50. The difference in the price is the burden of tax RM2.00, which is shared equally by buyer and seller.

Figure 2.4 : The government revenue is the portion of A and B

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2.4.2 CASE STUDY

Duty Hike Puts Tobacco Boys in a Bind

For the local cigarette manufacturers, it must feel like September already. There are still two months to go before the Government tbales the yearly budget, but the unprecedented excise duty hike for cigarettes announced last week already has the tobacco boys in a bind. On July 2, the Finance Ministry announced that the excise duty for cigarettes would be increased by 25% with immediate effect. Industry watchers worry that industry volume could be severely hit now that the price of a 20-stick pack of cigarettes has increased by 11 to 14% - RM8.2 (for most premium brands) and RM6.70 (for value brands). They contend that although the price increase can sufficiently cover the excise duty hike, a significant level of down-trading to low-priced or contraband cigarettes is expected to occur. A lot of cheap cigarettes are produced illegally by small manufacturers,who have been steadily making their presence flet in the value-for-money segment in recent years. The value segment of the local cigarette market has been recording encouraging growth in the last few years, thanks to the rising trend among smokers of down-trading or switching from premium to value brands. It was only in April this year that the Health Ministry threatened to impose a minimum price on tobacco products if the companies did not end their price discounting activities, which were seen as thwarting the Ministrys public health campaign aimd at getting smokers to kick the habit and curbing underage access to the products. The consequences of the latest move, however, are that it could lead to a rise in smuggling activity and proliferation of low priced cigaretts. Aseambankers revised its neutral rating for the sector to underweight following the July 2 announcment. It has also downgraded its recommendations for British American Tobacco (M) Bhd(BAT) and JT International Bhd (JTI) to fully valued. The house expects the earnings of the two companies to be hit by 8-12% between financial years 2007 and 2009. Demand may be inelastic but we suspect pricesnsitive consumers will be more than willing to down-trade now thatthe sub-value (lowpriced) brands are easily available,it says. Aseambankers expect industry volume sales for 2007 to drop by 8-10% now, compared with its earlier expectation of a 2-3% decline before the recent duty hike. Our new assumptions
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would be similar to the actual volume decline in 2005 and 2006. Recall that prices were previously raised as high as 15-30% but the volume decline was just over 10%, its analyst Khair Mirza expalins.

JP Morgan points out that the expected slide in industry volume could be mitigated if the government beefs up its enforcement on the contraband market and implements a minimum price of RM5.00 per 20-stick pack to narrow the price gap between the quasi-legal and the legal cigarette market. As things stand, the house has adjusted its financial year 2008 volume assumptions for BAT from a contraction of 3% to a 5% decline. Every onepercentage point decline in volumes would cause itsearnings for BAT to contract by 1.6%. Despite the generally bleak prognosis for the sector and its listed players, Deutsche Bank offers a contrarian view. At this juncture, Deutsche Bank sees no compelling reason for investors to offload BAT shares despite the fact that the house has adjusted BATs earnings downwards, after imputing a 6% volume contraction, and revised its target price for the stock to RM40.00 from RM 42.25 previously. The foreign research outfit believes that BAT will maintain its dividend of RM2.50 per share. This translates into a net yield of 5.8%, which is higher than the market average of 3.3%. Likewise, Citigroup reckons that the civil servants 35% salary hike, which takes effect this month, and the governments continued pump-priming efforts have helped boost disposable incomes and consumer sentiment. As a result, the house argues that most smokers are likely to absorb the highr prices. This would cause volume growth to remain at 1% next year.

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2.4.3 CASE STUDY

Petroleum Income Tax Act Will Be Utilised To Incentive New Players To Enter The Marginal Field Development Segment.

The Global Incentives for Trading (GIFT) programme is a set of incentives designed to encourage global petroleum trading companies to use Malaysia as their regional base to enter the markets of China, India and Southeast Asia. Malaysia offers petroleum-storage and petroleum-trading companies a competitive advantage in terms of vast land areas, access to world class infrastructural facilities, a cost efficient place for doing business, excellent banking and financial services, a highly skilled multi-cultural and multi-lingual professional and technical workforce and a pro-business, investor-friendly government and agencies. With these facilities and incentives in place, Malaysia hopes to serve as an oil and gas hub for the Asia Pacific region, similar to how the Amsterdam-Rotterdam-Antwerp hub serves the European market. The GIFT Programme is managed and supervised by the Labuan Financial Services Authority (Labuan FSA). Companies that participate in the GIFT programme will register their companies under the Labuan International Commodity Trading Company (LITC). LITC-status companies can trade in petroleum, petroleum-related products, selected commodities, including minerals and carbon credits. To date, trading licences have been awarded to Petco, a subsidiary of PETRONAS Bhd., Dialog Group Bhd, YTL Power International Ltd, a subsidiary of YTL Group Bhd., BB Energy of the United Kingdom and Vitol Trading Malaysia Labuan Ltd, a subsidiary of Vitol Group of Switzerland. Malaysia Petroleum Resources Corporation (MPRC) is the architect and developer behind the GIFT programme. MPRC is an agency under the Prime Minister's Department, with a mandate to oversee and implement policies and programmes to transform the oil and gas services industry in Malaysia. The objective of this transformation is to create regional and global champions from Malaysia's oil and gas services companies and to encourage global oil and gas multinational companies to use Malaysia as their regional or operational headquarters for the Asia Pacific region.

2.4.4

Effect of elasticity on tax burden

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The portion of tax shared between buyer and seller depends and the elasticity of demand and supply. In the earlier example, we had seen that the buyer and seller shared equally the amount of tax. The burden of tax will differ depending on the elasticity of demand and supply. Figure 2.5(a) illustrates how the portion of tax shared between the buyer and seller when the demand is inelastic compared to supply. In Figure 2.5(b) , the demand is more elastic than supply. As shown in Figure 2.5(a), the buyer shared more of the burden of tax since it its demand is inelastic. The initial equilibrium price and quantity are the same as in Figure 2.4. The price the buyer pays is RM9.00 per pack and the price the seller receives is RM7.00 per pack. The buyer had to bear the burden of RM1.50 while the seller only shares RM0.50 of the total tax of RM2.00 per pack.

In Figure 2.5(b) the seller would share higher portion of tax burden since the demand is more elastic than supply. After the tax had been imposed, the price the buyer pays is only RM8.00 per pack and the price the seller receives is RM6.00 per pack. In this case the sellers share of tax is RM1.50 and the buyers share is only RM0.50 per pack.

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SS 9.00 BUYER 7.50 7.00 SELLER SS

300 Figure 2.5(a) : Demand is Inelastic to Supply

SS Price (RM) SS

8.00 7.50

BUYER Eo SELLER

6.00

DD Quantity (kg) 300

Figure 2.5(b) : Demand is More Elastic than Supply

The initial equilibrium price and quantity is RM7.50 per pack and 300 packs of cigarettes, respectively. In (a), the demand is very inelastic than supply, the burden of tax is more to the buyer compared to sellers. The buyers share of tax is RM1.50 and sellers share is only RM0.50. In (b), the seller bears more tax than as demand is more elastic than supply. The sellers and buyers share total tax of RM1.50 and RM0.50 per pack, respectively.

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2.5

Impact of subsidy

The impact of a subsidy on equilibrium price and quantity is the opposite of tax effect. Subsidy is an incentive from government to encourage producers or sellers tp produce more. Subsidy would lower the cost of production. Malaysian government provides subsidies for fertilizers, petrol, diesel and others.

Price S0 S1

DD Quantity

Figure 2.6 : Effects of subsidy

The effect of subsidies on the equilibrium price and output are the opposite of tax effects. A subsidy is an incentive from the government to encourage producers or sellers to produce more. Subsidy will lower the cost of production. Subsidies by the Malaysian government are fertilizers, petrol, diesel and others. Table above summarizes effects of subsidy. The government provides a subsidy, the supply will increase because of a subsidy encourages producer to produce more. Supply increases and the supply curve shifts to the right from S0 to S1.

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2.5.1 Subsidies and equilibrium in market

Suppose that the government provides subsidy of RM1.00 per gallon for petrol. This would increase the supply and shift the supply curve to SS1 as shown in Figure 2.7. Before the subsidy, the equilibrium price and quantity for petrol is RM1.50 per gallon and 1 million gallon of petrol, respectively. The effect of subsidy of RM1.00 per gallon on equilibrium price and quantity is illustrated in Figure 2.7. The new equilibrium occurs when new supply curve, SS1 intersects with demand curve, DD at price of RM1.00 per gallon and quantity of 1.2 million gallon of petrol. The price the buyer pays is lower to RM1.00 and the price the seller receives is at RM0.50. The benefit from subsidy of RM1.00 per gallon of petrol is shared equally by buyer and seller. Figure 2.7 : Subsidies and equilibrium price and quantity in market Price (RM per gallon) SS0 SS1

1.50

BUYER 1.00 SELLER DD

0.50

1.2 Quantity (gallon)

The initial equilibrium price and quantity for petrol is at RM1.50 per gallon and 1 million gallon of petrol, respectively. A subsidy of RM1.00 per gallon would shift the supply curve to right from SS0 to SS1 and equilibrium price drops to RM1.00 per gallon while quantity at 1.2 million gallon of petrol. The buyer and sellers shares RM0.50 each from the total subsidy of RM1.00 per gallon.

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2.5.2 CASE STUDY

Cooking Gas Subsidy Slated To End In Second Quarter

The governments plans to end the subsidy for cooking gas in the second quarter of this year when the world price of liquefield petroleum gas is expected to fall below US$250 per tonne. Metta Banturngsuk, Director of the Energy Policy and Planninf Office, said the global price of LPG or cooking gas had fallen by $65 to $265 per tonne in the past month.

As a result, the subsidy through the state oil fund had been reduced to 67 satang per kg, or about 139 million baht per month. However, the retail price of cooking gas remained unchanged at 15.81 baht per kg.

Mr.Metta said the decline the decline in LPG prices had been taking place as analysts forecast, and prices were expected to continue falling to below $250 per tonne in the second quarter this year. When that happens, the subsidy is no longer needed, in line with the Energy Ministrys policy to liberalise cooking gas prices sometimes this year, one yaer ahead of schedule, he said.

Once cooking gas prices are freed up, Mr. Metta said, they would not only move according to the market, but the change would encourage more efficient and economical use of gas and help reduce the oil funds debt. The oil fund currently has a capital of 2.59 billion baht. As of March 8, unpaid subsidies for petrol and cooking gas prices stood at 2.76 billion baht, of which 1.23 billion baht was for cooking gas. The remainder was for petrol during the pricecapping exercise that took place between Jan 10 and March 3. The oil fund remains in deficit at 169 million baht.

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2.5.3 Effect of elasticities on subsidy

As same in the tax the benefits shared by buyer and seller from subsidy depends upon the elasticity of demand and supply. As shown in Figure 2.8(a), the buyer benefits more than seller since the demand is very inelastic than supply. The initial equilibrium price and quantity is RM1.50 per gallon and 1 million gallon of petrol, respectively. After the subsidy is given the new equilibrium price is RM0.80 per gallon and the price seller receives is RM 0.50 per gallon. Total subsidy of RM1.00 per gallon is shared by buyer (RM0.70) and seller (RM0.30).

In figure 2.8(b) the seller would benefits more from the subsidy than buyer as demand is more elastic than supply. After the subsidy of RM1.00 is given, the price the buyer pays is RM1.20 per gallon and the price the seller receives is RM0.50 per gallon. And as we say, the seller enjoys the subsidy of RM0.70 per gallon and the buyer enjoys only RM0.30 and the buyer enjoys only RM0.30 per gallon.

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Price (RM per gallon)

SS SS

1.50 BUYER

0.80 0.50

SELLER DD

Quantity (gallon)

Figure 2.8(a) : Demand in Inelastic to Supply

Price (RM per gallon) SS SS 1.5 BUYER 1.20 0.70 DD Quantity (gallon) Figure 2.8(b) : Demand is More Elastic than Supply SELLER

In (a), the demand is very inelastic than supply, the buyer enjoys more benefits from subsidy than seller. The buyers share of subsidy is RM0.70 per gallon and sellers share is only RM0.30 per gallon. In (b) the seller enjoys more benefit than buyer as demand is more elastic than supply. The sellers and buyers share the total subsidy of RM0.70 and RM0.30 per gallon, respectively.

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3.0 CONCLUSION

As a democratic countries we need to apply a mixed economy in our system. It does generate higher economic growth due to legal protection of property rights, also give a high investment rates and the openness to trade. This is approved for a half century, we have enjoyed both tremendous prosperity and relative economic equlity thanks to the policies pursued by our democratics parties. In line with the progression our nations used their relative wealth to ensure a high standard of living for their citizens high wages, health care and education. We could conclude that the benefits being distributed equally to the citizen which represent our country and to the business itself. This is clearly shown as below:

Citizen : Better quality of life reward for innovation and creativity. Greater confidence in the robustness of the economy. Living and working in safe surroundings. Equal and easy access to information. Mutual respect and individual dignity. More choices and higher purchasing power

Economic growth : Confidence in the openness and fairness of government tenders. Fair Market Pricing with minimal exceptions, subsidies and price controls. Private sector-led growth. Promote competition across and within sectors to revive private investment and market dynamism. Encourage Public-Private Partnership. Localized autonomy in decision making. Empower state and local authorities to develop and support growth initiatives, and encourage competition between localities. Favor technologically capable industries and firms. Grant incentives to support innovation and risk-taking to enable entrepreneurs to develop higher value added products and services. Retain and attract skilled professionals. Embrace talent, both local and foreign, needed to spur an innovative, high value added economy.
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REFERENCES

1. Deviga.V, Karunagaran.M, & Rohana Kamaruddin. (2008). Microeconimics. Selangor : Oxford University Press.

2. Deviga.V, & Karunagaran.M. (2007). Principles of Economics. Selangor : Oxford University Press.

3. Azizah Daut. (2012). Micro Economics. Johor Bahru : Oxford University Press.

4. Admin. Copyright 1996-2010. Benefits and Advantages : Advantages of Mixed Economy, Retrieved April 20, 2012, from http://benefitsandadvantages.com/general/advantages-of-mixed-economy.ht

5. Copyright 2012. What are the disadvantages of mixed economy, Retrieved April 20, 2012, from http://wiki.answers.com/Q/What_are_the_disadvantages_of_mixed_economy _system

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LIST OF TABLE

Table 2.1 : Difference between price ceiling and price floor

14

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LIST OF FIGURE

Figure 2.1

: Fixing the price below the equilibrium level creates an excess in demand or shortage

Figure 2.2 Figure 2.3 Figure 2.4

: The efficient outcome in the price of low-cost houses in Malaysia : Excess supply of unskilled labours in the market . : The government revenue is the portion of A and B

10 12 16 21

Figure 2.5(a) : Demand is Inelastic to Supply

Figure 2.5(b) : Demand is More Elastic than Supply Figure 2.6 Figure 2.7 : Effects of subsidy : Subsidies and equilibrium price and quantity in market

21 22 23 26 26

Figure 2.8(a) : Demand in Inelastic to Supply Figure 2.8(b) : Demand is More Elastic than Supply

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