Last week was insane. I stayed back everyday till late evening in school. I had programmes in school and events in hostel at night. And even my saturday was not spared. Let’s see this week. Less hectic but still quite busy. Got to stay back for 4 out of 5 days. Geez. Still quite bad. And I’m now coming into a patch where there are lots and lots of mock tests, assessments to gauge our preparation for our prelims exam. GAAAH.

I’m not prepared for any. Got it. NOT PREPARED AT ALL. I dun even have time to study, how can i ever go and take a test? Nutcase. I guess it’s not the same for the others since they have had the last 5 weeks to study.

Nevermind. Still got time. Just gotta work hard. Pumping up on those coffee. For the first time I’m gonna start relying on coffee and making a slight tweak to the study style. Hopefully this works. (correction: this better work, else i’m screwed)

Anyway, yesterday I was at NUS the whole day for the National Economics and Finance Management Quiz 2008. Was part of the 21 from our college that was selected for the competition. Had some preparations from school. But it’s complicated. Thought we did not stand a chance to win nor do we stand a chance to win any special certificate.

We were surprised when we were awarded the certificate of merit. It means we were the top 25 ranking teams out of the 100+ teams who participated. I had to double check my team name on my name tag when the team name was flashed on the screen. haha. really din expect to win consolation prize since we made some rather silly mistakes and had many questions on cpf and insurance answered wrongly.

Oh btw, zhi wei’s team also won certificate of merit. haha, both the guys from 23/07 in diff teams won something. we were the only 2 teams fr AJC that won something.

It’s a whole day event from 10am till 5pm. Being good economics students, we were constantly arguing whether the opportunity cost of taking part in the competition will be worthwhile. Some professor said our opportunity cost was the time wasted in not being able to watch the new Batman movie. But seriously, that’s not our opportunity cost? Our opportunity cost now when time is really in scarce supply is that of not being able to revise and complete our homework. Luckily we won something, at least it reduces the opportunity cost. But it might still be costly……lol….

what am i doing now? time is limited. i should get back to my work….haha

I’m not going to sit here condemning the Government’s decision to increase the retail price of oil in Malaysia. I’m actually half happy and half sad that the Government is doing this.

Half-Happy

The decision to increase the retail price of petroleum and diesel is a brave one. It’s going to be gravely unpopular with the public considering that rising cost of living was a major factor that led to the huge defeat by the ruling coalition.

From a macroeconomic point of view, I’m glad the decision was taken because Malaysia can never continue subsidising fuel. Malaysia is a net oil exporter. It will be a net oil importer in the next few years and its oil reserves is projected to diminish in the next 10 years. World oil prices have increased about 400 percent to roughly US$130 per barrel. The increasing world oil prices have seen the oil subsidies provided by the Malaysian government ballooned from RM19billion to a projected RM55billion this year.

Our whole economy is crippled by the Government’s inability to allocate valuable resources to more important investments for our country’s future growth. And the subsidies provided by the Government have only exemplified the subsidy mentality. Are we experiencing a mini resource curse where countries with natural resources experience slower economic growth?

Half-Sad

I’m actually pessimistic with this decision because the reduction of fuel subsidies will lead to inflation. And the problem with inflation in an economy like Malaysia is more serious as compared to Singapore. In Singapore, wages are continuing to rise due to the labour shortage and as long as the increases in wages are higher than the inflation level, there would not be much of a problem. But the problem with Malaysia is wages are not rising as fast as it ought to be.

This leads to a more serious fundamental problem plaguing our economy – our comparative advantage. We are still stuck in our 1980-90s mentality of attracting low value-added manufacturing FDI. We forget that we do not possess the comparative advantage in labour intensive industries anymore as countries like China and Vietnam open their doors to foreign investors.

This debate can go on for pages on where Malaysia has gone wrong, but I shall not spend time elaborating. There are many factors – corruption, transparency issues, education system, government efficiency etc

The bigger question that we should ask is what the government will do with the savings from the reduction in oil subsidies. In fact many will argue that the government is actually richer than ever before considering that Petronas and other commodities companies are posting record profits thereby contributing significantly more to the Government’s coffers through corporate taxes.

I’m sad at this because the bare fact is we do not know. The money might be used to fund important infrastructure projects or to improve our public transport, both of which will boost our country’s competitiveness and attractiveness as an investment location. Or the money can be wasted on some corruption-laden non-productive projects.

Where are we heading after this?

I was reading the Today newspaper dated 27th November and there I read a published letter by a person on one method of ending rampant piracy of music, movies and computer softwares.

He was saying that no matter how tough the enforcement of the piracy law is, piracy will not go away easily. Well, in Economics term there is such a thing called demand for such pirated goods due to the cheap prices offered relative to the original products. And when there is a demand for such products, there will be people willing to take the risks (in this case fines and jail terms) to supply these products to earn profits.

The average guy down the street will feel that they are being ripped off by the huge companies for charging a very high price for their products and will resort to pirated goods to offset the high costs.

As such, the author suggested using the Big Mac type of pricing for these products to make them more affordable for the average person in different countries. When original products are more affordable for a significant majority of the population, people will be more inclined to buy original products thus lowering the piracy rate. Of course this have to be coupled with education on respecting intellectual property, but the current tactic of using only education and law enforcement is not very effective because it doesn’t deal with the affordability aspect of the problem.

The author goes on to continue giving example of how the Big Mac is priced differently in different countries although it is supposed to be the same size and have the same ingredients. For example the Big Mac costs S$3.60 in Singapore but across the Causeway in Malaysia it costs only S$2.40. In the US, it is S$4.70 while in Switzerland, it is S$8.20.

The Economist magazine also has a Big Mac index to measure the different prices of Big Mac around the world. It is based on the economic theory of Purchasing Power Parity (PPP) to see how a certain amount of money can buy different amounts of goods in different countries. But their main function of the Economist’s index is to measure how a certain currency is undervalued or overvalued. It takes the US dollar as a benchmark to compare the Big Mac prices and it found that certain Asian currencies are undervalued by as much as 40-50%.

Source: http://www.economist.com/markets/indicators/displaystory.cfm?story_id=8649005
Continuing on, what the author suggest is pretty much feasible. If McDonalds can do it worldwide and charge a different rate for the same product (Big Mac), why can’t the music, video and computer software companies implement the same thing?

They can charge different prices for the same product in different countries thereby making their products affordable for the masses. Then, they can all stop bitching about rampant piracy cutting their margins.

I believe this is a very reasonable idea to be adopted. Price Discrimination as they may call in Economics where producers charge different prices for the same product. Companies practise it all the time. But why can’t they use it for this purpose. Book producers do it by charging a cheaper price for text books for sale in Asian markets but a higher price in European markets. At the back of the book you see a small note: For sale in Asian markets only.

Well, Economics text books say: For Price Discrimination to occur, the supplier must have monopoly power, there must be a segmentation of the market, resale of the product must not be possible and the demand elasticity of the product must be different.

In this sense, the music, video and computer software industry satisfies all these 4 conditions.

In fact, by using this method, the producers will be able to increase revenue and profits. Although the producers will earn less for every product sold, but because the product is price elastic in Asian markets (Asians are very price conscious and will buy the cheaper alternative [also dependent on level of respect of intellectual property]), the overall decrease in prices will result in a more than proportionate increase in products sold. And as a result profits will increase. To make profits for the companies even bigger, they can further price discriminate internally within a country. They can charge consumers a lower rate. Companies and government that uses the products for commercial purposes meanwhile can be charged a higher rate.

I am very puzzled while such a simple idea cannot be implemented by these huge companies. Why can’t they work with the free market and undertake policies accordingly? Instead they are focusing all their efforts in bitching to governments to enforce piracy laws etc.

Record companies themselves are passionate about price discrimination. In fact they are pushing to practise price discrimination in the online music trade world. As we all know, Apple’s iTunes Music Store charges US$0.99 for a single download of song. However, record companies are pushing for flexible pricing. It wants iTunes Music Store to charge newer songs at a higher price and catalogue materials for less.

Source: http://www.engadget.com/2006/04/21/apples-itunes-pricing-to-stay-at-99-cents/

Why want to price discriminate in the US but not in Asian markets? Even for the 99cents a download, it is pretty much expensive for the average Asian consumers.

Take for example the average music CD price. In Malaysia, the average music CD costs RM40. In Singapore, it is around S$20 while in the US it is around US$10.

Assuming the average pay of the average worker is RM2000, S$2000 and US$2000 in the 3 countries, one will easily understand why piracy is more rampant in Malaysia and almost non-existent in the US. This is because to buy an average music CD, it costs 2% of the average Malaysian pay, 1% of the average Singaporean pay and 0.05% of the average American pay. You see, the proportion of income spent on music CD will be much higher in less developed countries. This is related to the Economist’s PPP because currencies of less-developed countries tend to be undervalued to the US dollar.

Big Mac is priced differently in different countries to make it more affordable for the average man. Yet, we have not heard of McDonalds complaining of low sales because it is not affordable.

Yes, it does not suffer from piracy situation, but it does have many local competitors who offer similar burgers at a cheaper rate.

Yes, I would agree that pirates sometimes can duplicate a product to such great quality that sometimes one cannot disseminate the differences of an original to a pirated product. But things can be further improved by educating the public on intellectual property. However, people will not resort to original products if the price difference is too massive.

One question for all of you to ponder: Why do book publishers rarely complain about piracy, in this case students photocopying their books? Because first the practise price discrimination according to regions and more importantly they offer value-added products. They offer more information on their websites, CDs with more programs, softwares, online tutoring, online mentoring, online marking and the list goes on.

Yes, I would agree that the cost of producing the goods will be similar although the selling price will be lower in most Asian countries. However one also has to consider that the cost of promoting a product will also be lower in Asian countries and the possible benefit of eradicating piracy in the long run.

In conclusion, by using the Big Mac style of pricing, products will be significantly affordable for the average man in different countries. With continuous education and campaigns on the need to support intellectual property and law enforcement by the police, I’m pretty sure more and more people will soon resort to buying original products and piracy rates will go down.

Technorati Tags: piracy, music, Economics, Big Mac, pricing, Purchasing Power Parity, price elastic, Asian, free market, Record companies, price discrimination

Credit for Bad Behaviour. If buying offsets can excuse excessive carbon use, why not other irresponsible acts?

This is a cool article that appeared in the latest edition of Time magazine (July 9, 2007, pg 17)

For most JC Economics students, you would most likely completed studying about Market Failure and the solutions to counter Market Failure….And one of the solutions to counter environmental problem is to have a tradable carbon permit scheme to reduce emissions of carbon dioxide.

Based on this tradable permit idea, the writer, Michael Kinsley wrote about a myriad of other applications of this concept in our life. Some sort of new capitalism I would say.

“The genius of carbon credits is that it opens up a whole new inventory of things that people can buy and sell. And there is no reason that the principle should be limited to environmentalism”

What sort of other applications can this be applied in? Already it’s complicated enough for the concept to work in the environment area….

“For example, how about a “bad parenting surcharge”. It would work like this.
Suppose you come home after a hard day of work, and there is your acne-ridden, foul-smelling brat of a son - if, indeed, he is you son, which is hard to believe - playing video games with his friends. Your living room is strewn with Dorito crumbs and other detritus that doesn’t bear close examining. Needless to say, the lawn has not been mowed as promised. How would you like to slug him? You know you shouldn’t. But what if by slugging him, you could actually reduce the total amount of child abuse in the world? Wouldn’t that be a good thing?

What’s needed us a market in child abuse credits. Somewhere in the world there is a parent who is slugging his kid every night. For a price, he would refrain for a night, or even two. By paying that parent not to slug his kid twice, you gain the right to slug you kid once.

It’s a win-win-win. You get to slug your id. This other father gets the money. The other guy’s kid is happy - he gets a night off from being slugged.”

Sounds too optimistic to be true…And for me, it’s an idea that is incredibly theoretical in nature and has absolutely no chance of seeing light in reality…

A market in child abuse credit? Laughable….And how will the system work? How will you know that the parents will be honest? There is absolutely no measuring or accountability system in place….

A creative idea, but a real theoretical one indeed…..What do you think?

Technorati Tags: carbon, Market Failure, bad parenting surcharge