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News Article Analysis Submission 2

Topic: Markets in Action


Headline: Scrap rice subsidies, IMF urges Thailand.
Source: The Straits Times (Singapore)
Date: Friday, November 1, 2013

Summary
The recent (International Monetary Fund) IMF review on Thailands economy has
raised a red flag on its growing budget debt and the Thai government is scrambling
to try and reduce its deficit by implementing taxes and subsidies on its citizens.

Related economic concepts


Price Floor: A Price Floor is a legal minimum price imposed for a product to be sold
by sellers to buyers.
Tax: A Tax is an added cost implemented to the producers, increasing the cost of
production.
Subsidy: A Subsidy is the opposite of a sales tax. This is where financial aid is
given to producers to reduce the cost of production of a good.
Price Elasticity of Demand (Elastic and Inelastic): Price Elasticity of demand
tells us how much quantity demanded will increase or fall for a given change in price,
ceteris paribus.

Economic Analysis
Thailand is currently facing a growing debt and this is due to the government placing
a price floor on the rice that its farmers produce. This existing price floor is shown in
the article which states: The IMF said the governments agreement to pay about 40
per cent above market prices would make losses inevitable.

Effects of a Price Floor


Price
Legend
S= Supply

Surplus
Pf
E

D= Demand
Pe= Equilibrium Price

Legal

Pe

Illeg

Pf= Price Ceiling


P= Price

Q= Quantity

Quantity
Q1

Qe

Q2

The resulting effects are as follows:

Quantity supplied of rice would increase from Q e to Q2


Quantity demanded of rice would decrease from Q e to Q1
This results in a surplus of rice from Q1 to Q2

Due to this price floor, the government has to purchase the surplus rice from the
farmers in the form of subsidies, given to their rice fund. It is this huge commitment
of funds to Thailands rice scheme that is increasing their public debt. This is as
shown in the article that says: .and a 410 billion baht fund to pay for the rice
scheme was unlikely to contain all the losses.

To combat this problem, the IMF has cautioned Thailand on its current subsidies it
gives to the farmers which reduces the cost of production for its rice producing
farmers. This is highlighted in the article which states: Thai officials said that
government programmes help to boost productivity and encourage farmers to invest
in new equipment.

Current Effects of Thailands Subsidy


Legend
S= Supply
D= Demand
E= Equilibrium Price
P= Price
Q= Quantity

The effects are as follows:

Subsidies increase the net earnings of the seller and thus cause an increase
in supply.
The price of rice would therefore fall from P1 to P2.
And the supply of rice would increase from Q1 to Q2.
This is shown by the rightward shift of the supply curve.

If Thailand removes the subsidy, this would help to cut the current surplus of rice the
government has to pick up and this will also ease the pressure on private
consumption by the Thais and exports of rice to ease this surplus. This is supported
by the article which states: But exports which account for more than 60 per cent of
the economy and private consumption remains weak.

The Thai government could consider implementing taxes to help to curb their deficit.
This would mean that a certain percentage or amount of money made by registered
businesses or people would have to be given to the government. As stated in the
article: The government should consider reducing energy subsidies and increasing
corporate income taxes and eliminating some tax credits to meet its budget goals
This is shown by the graph below:

Effects of a Tax
S+

Price
Legend

Tax

S= Supply
D= Demand
E= Equilibrium Price
P= Price

P2
P1
P3

Q= Quantity

D
Quantity
Q2

Q1

*This graph indicates


percentage tax.

The effects of the possible taxes in place are as follows:

Price paid by consumers increases from P1 to P2.


Quantity purchased falls from Q1 to Q2.
The after sales tax received by the sellers falls from P1 to P3.
The amount of tax revenue received by the government is equals to the
amount of tax per unit. (Shaded Area)
Therefore the supply curve diverges (in this case) towards the left.

Conclusion
In conclusion, for Thailand to reduce its growing public debt, the government has to
take actions to help to curb public spending and to increase the governments
resources. By choosing to only cut subsidies, Thailands government cannot hope to
recover enough money to reduce the public debt. They also cannot hope to rely only
on increasing corporate income tax across the board without proper justification as
this would cause much unhappiness amongst the people on both fronts.
One way, to combat this however is for the government of Thailand to consider
implementing taxes on inelastic goods like cigarettes or alcoholic drinks. This is
because even with a tax increase, or an increase in price, people would still be
inclined to buy these products because there are lesser availabilities of substitutes
and that most people spend a small proportion of their income on the good.
This is shown by the graph below:

Effects of a price increase on an inelastic good e.g. Cigarettes


Price

Legend
D= Demand
P= Price

50%

P2
P1

Q= Quantity

D (Steeply

Quantity

Q2 Q1

Therefore, by significantly increasing 5%


the price of inelastic goods, e.g. from P 1
to P2 by 50%, there would be a relatively smaller reduction in quantity
demanded of the good, falling from Q1 to Q2. Therefore the government can
recuperate back more money at a faster pace to reduce their public debt.
However the government must realise that they must proceed with the
removal of subsidies and the implementation tax increases cautiously and
with proper justification to prevent angering their citizens. If done properly, I
am sure that the government of Thailand can employ markets in action to
solve their debt crisis slowly but surely.

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