Tue, Jun 03, 2008 - Page 8 News List

To subsidize or not to subsidize?

By Wang Chun-chieh 王俊傑

Last Wednesday, the government was forced to implement a massive raise in fuel prices. Although this is not the fault of Premier Liu Chao-shiuan’s (劉兆玄) Cabinet, whether it was a reasonable measure is worthy of discussion.

The Cabinet’s claim that a one-time price hike was sufficient was obviously just a cover-up, because the government and the state-run CPC Corp, Taiwan have already absorbed 40 percent of the cost. Unless this is a long-term policy, another massive raise in fuel prices will occur when the government and the CPC stop absorbing these costs.

If one price hike is sufficient, expectations for another hike will disappear. But in Taiwan’s economy — where we are used to government intervention in energy prices — it is questionable whether a market equilibrium can be quickly achieved in response to the price hikes. And since it obviously isn’t a one-time price hike, why go through the trouble of saying that it was?

Another problem was that the complementary measures are disappointing. In addition to subsidies to the agricultural and fishery industries, we seem to be left with adjustments to the commodity tax and public transportation subsidies. But the original purpose of the hike was to control demand through high prices in the hope that oil prices in the long run would come to reflect actual cost, so that consumers would think twice when choosing their transportation. If the government reduces the commodity tax on fuel products, it would lose the capacity to control demand through high prices. Although the results of such a measure would not be apparent in the short run, it is necessary to start now.

Short-term subsidies should be given to public transportation because the government controls the prices of these businesses and therefore cannot ignore their constantly rising costs. Such subsidies should be cancelled once prices reflect the increased cost of oil. Otherwise, the incentive to replace high fuel consumption vehicles or save energy may weaken.

The belief that offering subsidies to public transportation systems can change people’s transportation habits in the short term is a myth. Public transportation systems are economies of scale. If more people choose to take public transportation because of the fuel price hikes, the shared cost for each passenger will drop. This means that they will be less sensitive to rising fuel prices than private means of transportation, which is enough of an advantage by itself.

In addition, public transportation networks are not fully developed in certain areas, so people in those areas would not equally benefit from such subsidies.

The hikes were implemented five days earlier than planned to limit illegal hoarding. But the suddenness of the announcement also damaged the government’s credibility — particularly because the raise was not really a one-time hike. Won’t operators and the public hoard oil illegally again if the prices are raised again next month as expected?

Illegal hoarding needs to be resolved by specific inspection and punishment. The government is barking up the wrong tree by changing the timing of implementation to resolve the matter — especially when a one-time hike is impossible.

Reasonable complementary measures should be able to maintain not only the public’s standard of living but also national economic efficiency.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top