[1367] Of diesel subsidy removal and tradable coupons

On Tuesday, I expressed my disbelief of NST advocating for an elimination of fuel subsidy based on economic reasoning. Mainstream media controlled by UMNO is not known for its economic rationale but are only good at sucking up at anything that UMNO says. Therefore, I opined that the support is possibly due to the NST sucking up to the power that be. Today in the NST, it is revealed that the government of Malaysia is conducting a study on the effect of diesel subsidy removal.

KUALA LUMPUR: The government is studying the implications of removing the diesel subsidy, but has not decided to increase the price of petrol following rising global crude oil prices, the prime minister said.

Datuk Seri Abdullah Ahmad Badawi said while a decision had to be made on the subsidy for diesel, the needs of the poorest consumers, especially low-income fishermen, had to be considered. [Study on removal of diesel subsidy. New Straits Times. September 14 2007]

While I may be disgusted by the NST’s move, I would like to applaud the government’s intention to remove diesel subsidy. The current fuel subsidy in Malaysian is an awfully blunt tool that do more harm than good. I have suggested that the government should reduce tax instead of maintaining subsidy.

If the government wishes to eliminate the subsidy but still would like to support certain groups like fishermen, that is easily done. There is another alternative to the current fuel subsidy policy and the answer is coupons. Specifically, tradable coupons.

The government could simply distribute fuel coupons to these groups, presumedly deserving of it, and let members of the groups to either purchase diesel with the coupons or sell it for hard cold cash at any price. The distribution of coupons however does still constitute as subsidy. Yet, the beauty of this policy is that it curb smuggling of subsidized fuel: smugglers could only purchase subsidized fuel through coupons and rational coupons holders would sell it close to market prize in most cases.

What is more important is that this precise policy is designed to accurately channel specific funds to specific identified groups, instead of a blanket subsidy practiced now in Malaysia which the society at large suffers deadweight loss. A coupon based subsidy policy reduces the deadweight loss, enabling more precious resources to be invested in productive fields like education.