Econoimy 101: What is a subsidy?

(Image source: http://www.blackcommentator.com)

Nothing teaches more about this English word “subsidy” than the fuel price hike event. But before that, just couple of facts:-

Fact 1: The Government says that it spends billions in subsidy every year

Fact 2: The fuel price in international market been increasing steadily over the years

Fact 3: Subsidy if it was in cold hard cash and being used to keep prices artificially low, it has to go!

Whilst we have been taking the Government’s word on subsidy, nothing more illustrates the layman working of subsidy by this story which I received by email (original source unknown):-

A man called Maha owns a farm which can produce 10 apples every day.

He has 5 workers to operate the farm. Each of them eats 1 apple daily and it is enough to keep them operating the farm normally. The remaining 4 apples, the landlord sells them at RM10 each and he earns RM40.

He uses the RM25 to improve the farm operation and facilities. He gives RM2.00 to each of his workers and he keeps the remaining RM5.00 as profit. Day by day, the farm is well developed and all of the 5 workers are happy with the money they can save.

When Maha passed away and there is a new landlord, Abdul comes to continue the farm operation. He says to the workers:” We need to improve the farm quality and redefine our way of thinking. From now on all of you only need to pay RM1.00 for each apple you eat. It is very cheap as the price is RM10 each outside the farm.”

The workers have no choice but to pay RM1.00 for the apple they eat daily. Their earning decrease from RM2.00 to M1.00 per person. As usual, Abdul sells the 4 apples and he gets RM40. He uses RM25 for farm improvement and pays RM10 to his 5 workers. He gets RM5.00 as profit. On top of that, he gets another RM5.00 from the apples that he sells to his workers.

In total, he gets RM10 as profit every day.

Soon, the apple price increases to RM20 each. The new landlord gets a higher profit as he gets RM80 for the 4 apples he sells daily. Then, he decides to give the farming improvement contract to one of his close friend, Samy.

Samy says:”Apple cost naik, improvement cost also misti naik.” So, the farm improvement cost increases from RM25 to RM50. In actual fact, the improvement only cost RM30. The remaining RM20, Abdul and Samy share evenly among themselves.

Let’s calculate how much Abdul gets daily:

RM10 (from farm improvement cost)

RM20 (Net profit by selling 4 apples: [Gross profit, RM80] – [Improvement cost, RM50] – [Wages RM10] = RM20)

RM5 (from selling apples to his workers)

In total, Abdul gets RM35 daily compare to RM10 initially when he takes over the farm from Maha.

His profit increases RM25 and the workers are still getting RM1.00 daily per person. The greedy Abdul does not want to stop there. One day, he says to his fellow workers:” You see ah, the current market price for one apple is RM20 and you are only paying RM1. See how lucky you are! I have to SUBSIDY RM19.00 for each of the apple you buy and total I need to SUBSIDY RM95.00.

This will greatly burden the farm and we might get bankrupt if we continue like this. In order to avoid bankruptcy, I need to increase the apple price that you buy from RM1.00 to RM1.50 and I will bear the remaining RM18.50 per apple as my subsidy to you all.

So, greedy Abdul adds RM2.50 to his current profit and the number becomes RM37.50.

After you have read the story, I am sure you have already understood the meaning of “SUBSIDY” given by the government. The RM95 subsidy never existed in the first place and so was the RM52 billion fuel subsidy generously “given” by the government.

Cutting fuel subsidy is actually just a reason to steal money from your pocket.

So, what does this means if one goes by the story above? That the people are being burdened with an increased cost of fuel just because someone out there wants to make extra profit? Is this why the oppositions had been asking Petronas to share its profit and slams the government for increasing the petrol price hike so drastically?

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Subsidy? What subsidy? Ai yah I don’t understand lah

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