Should the government continue subsidising essential goods like rice in Malaysia? Well to start off, what is the basic meaning of subsidy? Subsidy is financial support provided by the government to specific individuals, institutions or businesses. Basically subsidies act like negatives taxes, since it is money given by the government, not collected. It is usually given to encourage the production of certain goods, and therefore the consumption of certain goods. The government hopes that by giving producers a subsidy, it will lower the price of those specific goods, and of course when you get a lower price, market numbers indicate that there will be a greater quantity demanded. In this essay, the goods in question will be rice and we will discuss if the rice subsidy benefits whether the producer or the consumer.
Graph 1. (Rice domestic consumption from 1960 – 2014) (indexmundi.com)
As you can see from the above graph, rice is an important crop in Malaysia, with domestic consumption increasing almost every year and more than doubled from 1960 to 2014. The growth rate for 2013 – 2014 being 0.9%, considering the fact that 2014 is still ongoing. As much as the demand for rice is, the supply for rice in Malaysia is limited as it only reaches 65% of demand, while the other 35% is imported mainly from Vietnam and Thailand (Vengedasalam, 2006). With this in mind, the government aims to produce more rice locally by providing subsidies. We will now discuss the pros and cons of providing subsidies.
Graph 2 is a very basic supply and demand curve with the effect of a subsidy. Subsidy leads to an outward shift of supply, leading to a lower price and a higher quantity. At first glance, this looks good; consumers are getting more at a lower price, but it is actually much more complicated than that. When a subsidy is given, the entire subsidy does not get passed on to the consumer, in fact the producer absorbs and keeps some of the...