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ECONOMICS COMMENTARY

Name: Martin Naunov

Title of the article: Sugar industry assures adequacy of stocksSource of the article: Bangkok Post

Date the article is published: March 3, 2011Date the commentary was written: October 27, 2011

Section: 1. MicroeconomicsWord Count: 723

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To begin with, the newspaper article comments on the domestic allocation of

sugar in Thailand. More specifically, Thailand is currently facing a surplus, a state or

situation where the amount supplied exceeds the amount demanded for a product or

service. Demand is a curve showing the various amounts of a product consumers want

and can purchase at different prices during a specific period of time. Supply is a curve

showing the different amounts of product suppliers are willing to provide at different

prices.

As we can see from the graph, supply is conspicuously exceeding the demand. We

can clearly see that the price of sugar is found below the equilibrium price. The

equilibrium price is found where demand equals supply. In this situation, the price of

sugar is below the equilibrium price because the government has implemented a price

ceiling. Price ceiling, or Cap of Price - as being mentioned in the article, is defined

as the maximum price a seller is allowed to charge for a product or service. Price

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ceilings are regulations designed to protect consumers (especially low income portion

of consumers) from not being able to afford necessities.

However, the price ceiling effectiveness in this situation should be questioned

for several reasons.

In the paragraph 7 of the article the Industry Minister of Thailand, Chaiwuti

Bannawat is quoted. He states Thais consume no more than 2.3 million tons of sugar

per year so if we increase it to 2.8 million, it is as if we are encouraging our neighbors

to buy cheap sugar. In addition to this, the prices in Cambodia, Vietnam and China

are 35-50 baht, shown by the price equilibrium of the above graph, against 23.50 in

Thailand. In this case, it is clear that price ceiling promotes the problem of black

market in the form of smuggling. Smuggling is defined as moving goods illegally into

or out of a country. Sugar will be smuggled to neighboring countries, which may

cause an increase in the price of sugar and later lead to a severe shortage of sugar.

Furthermore, there already is a growing concern that a sugar shortage is looming,

even though Thailand is facing a relatively big surplus. These are false rumors but in

fact may cause a change in the consumers expectations leading to sugar shortage.

The psychology of the market has been documented in the article; people start to

believe that a sugar shortage will occur and in turn they start moving in a direction

where they buy and stock more sugar. Over time, the quantity demanded exceeds the

quantity supplied leading to a sugar shortage.

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Therefore, the sugar shortage may either be affected by either smuggling or

psychological reasons. In order to prevent a sugar shortage, as well as to minimalize

the surplus the government must take some actions. As suggested in the article, the

government should either step up controls against smuggling or reconsider the price

of sugar.

Thai agriculture is highly diversified and competitive. Thailand is a major

exporter in the world rice market. Grain, fishery products and many other agricultural

commodities are also produced in significant amounts. Therefore, stepping up

controls against smuggling is a long-term investment and even though it will cost the

government a lot of money, in a long run, the government will benefit from it in form

of taxes. On the other hand, some suppliers will not be able to charge for that price so

they will drop out of the market. This causes a decrease in the supply.

Products that are necessities, such as sugar in this case, are more insensitive

and inelastic to price changes - since there are no close substitutes available,

consumers would continue buying these products despite price increases. Price

elasticity of demand is defined as the measure of responsiveness in the quantity

demanded for a commodity as a result of change in price of the same commodity.

Following, the government may reconsider the prices and try to adjust the price cap in

order to decrease the price gap between Thailand and its neighboring countries

without having a significant decrease in the quantity demanded.

These two actions complement each other. For that reason, in order to fully

solve this problem, the Thai government should implement both of the actions.

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