Let me begin by stating that I support a significant cut in in duties and taxes on cars.

There are at least two reasons for that. One, the cut will allow market forces to work better so that we can have a more efficient environment. A simpler market arrangement will free up resources dedicated to an elaborate system that was initially designed to protect the domestic car industry at the expense of Malaysian consumers. Two, the cut will enhance consumer welfare, which is in some ways a restatement of the first rationale. It improves welfare because with cheaper cars, the same personal resources used to purchase cars can be used for something else.

Along the same vein, I also support the abolition of approved permits.

Theoretically, permits can make the market more efficient but only in the cases of market failure. Permits help redistribute resources better when the market cannot self-organize due to cost being individually unaccounted. When there is no market failure, a permit system causes inefficiency. Indeed in the domestic car market, the permit system adds to the cost of a car, adding inefficiency to the system. I do not see any market failure in the car market and so, in the name of efficiency, approved permits should go the way of the Proton Juara.

I am not the first to say this because the issue is not new. It has always been talked about in the background but it is only recently that it gained very public attention and it is all because of Parti Keadilan Rakyat’s Rafizi Ramli. He has been consistently raising it in the way that it forces the government to reply. The fact that the national election is around the corner, somewhere out there, helps too.

Putting the issue to the middle of the table is good. It is good because it raises the profile of a real and significant issue that affects welfare of Malaysians. Now we have one more policy debate and it is something concrete to talk about, away from the typically unfulfilling issues of race and religion that most times are superficial. That alone gets the thumbs up from me.

Rafizi proposes to make passenger cars in the country more affordable by eliminating or reducing the high duties and taxes imposed on cars. I do support that.

The latest turn in the debate revolves around the approved permits for cars. It is here where I find his position on the matter disagreeable.

He proposes to auction the permits and sell it to the highest bidders. That has caused him to be criticized by those supporting the status quo, others are against it as it is inconsistent. If the permits are auctioned to the highest bidders, then car prices will go up. This will be contrary to the aim of making cars more affordable.

He defends his proposal by stating that the abolition of duties and taxes on cars will ensure that the total price of car will be lower even with auctioned permits. How is that so? He asserts that the permits at the moment fetch prices between RM40,000 and RM60,000 and so, he expects that the same price levels will prevail in an open bidding system as well. This is the assumption that allows him to mount a defense against the criticism. He assumes every cost component as constant except for duties and taxes, which are significantly reduced or eliminated.

In my opinion, the criticism against Rafizi is justified and his defense is no defense. The reason is that his assumption of everything being constant but duties and taxes cannot hold. The reason is that there is no guarantee that the permit price must be in the range he stated.

An auction is a very efficient method at ensuring that the seller gets to sell his goods or services at the highest price possible. And if there is enough demand for permits while supply is limited, then ceiling price can be as high as the sky.

We do not know how high the bid price for permits can go right now. We can only assume and Rafizi assumes that the price range he cites is the benchmark.

Unfortunately, his assumption depends on one question: is the price range cited the result of open bidding among many auction participants, or a negotiated outcome within a small circle?

It is very possible that it is the latter. In the latter case, there is every reason to suspect that the price range cited is too low. Have an open tender instead and microeconomics will work its magic to push that range up to the appropriate level. I do not know how far up it can go. For all I know, the permit price can go up high enough that it may undo any reduction in car price resulting from the abolition of car duties and taxes. The only way to find know is to actually run an auction for the permits. Now, there is context to the auction debate. Those against the effort to cut duties and taxes on cars are worried about government revenue loss. Rafizi counters that that concern can be addressed by auctioning the permits. He is right about how an auction can address the worry, given how the current distribution system of permits is at best inefficient (since the government does not get the full value of the permit), and at worst corrupt.

There are other ways to address the concern about government revenue loss while being consistent with the objective of making cars more affordable. Auctioning the permits is just not one of those consistent solutions.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on September 21 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
n/b — for economic literates, this was written with quota quantity (or its relative quantity to total cars in Malaysia) unchanged. With significant increase in the number of quota, it’s possible for prices to fall even with auctioned permits under perfect competition and perfect pricing. If the quota remains unchanged and auctioned, no cut in taxes and duties will reduce prices. In fact, prices will remain the same in theory.

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