Never I actually thought this would ever be implemented: cash transfer instead of in kind!
PUTRAJAYA: The government is looking at ways to channel cash to the neediest target groups should the diesel subsidy be removed.
Deputy Prime Minister Datuk Seri Najib Razak, commenting on a Domestic Trade and Consumer Affairs Ministry announcement on Thursday that the price of diesel at petrol stations would soon be set at market rates, said the government was finalising methods of issuing cash to the groups most in need of the subsidy. [Cash instead of diesel subsidy for needy groups. New Straits Times. April 26 2008]
Cash transfer is superior to subsidy simply because of one economic concept: indifference curve.
Admittedly though, this policy suffers from moral hazard problem: the cash will be used for things other than diesel. But hey, only an individual knows his indifference curve. Let him decide if he really needs the diesel. Cash improves an individual’s indifference curve more effectively than in kind subsidy.
The government’s job here, if this program is to work, is to identify those who really need the cash transfer. That would be a tough job: it is another problem known in economics as adverse selection.
p/s — okay, I am overreacting. This is not quite a wet dream that I claimed it to be as libertarians are not too fond of wealth redistribution policy but I was overjoyed when I read the news nonetheless. It is still a superior policy to the previous version. Any microeconomics textbook will tell you that.
I am quite happy to see movement against subsidy is growing healthily despite the result of the general election on March 8. While PKR had successfully played the populist sentiment by supporting greater fuel subsidy and PAS offering fattening welfare state alternative, it seems that all that has not been successful in stopping the implementation of more liberal economic policies.
The economy should be in the upswing soon as more rational economic policies are set in place. Even without that, I am already optimistic about the future. The worst seems to have past, minus the discount created by slight political uncertainty in Malaysia.
