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ECO6201:Business Economics

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  • Course Code: ECO 6201
  • University: INTI International University
  • Country: Malaysia

Question:

1.Explain the determinants of the demand for and supply of cars. You are required to present THREE (3) determinants each.

2.With reference to the concept of externalities, explain the market failure that might possibly exists within the car market. Do use diagrams to support your answer.

3.The governments of various South East Asian countries have intervened to reduce road congestion within their own countries. Illustrate and compare the impact of any TWO (2) forms of these interventions on the car market.
 

Question:

Introduction

As per economic theory, one of the fundamental principles that govern economy is law of demand and supply. Law of demand describes the state when the price tends to increase with increase in demand and price tends to fall with decrease in demand. It can also be said that the demand of any commodity decreases with increase in price. The economy is said to be in equilibrium between quantity and price, when supply and demand are in balance. Buying of car is regarded as an act of saving as well as an act of consumption. The demand for any products is determined by number of factors such as price of the product itself, price of substitutes, income of consumers, taste and preferences (Baumol and Blinder 2015).

Rising disposable income-One of the crucial factors impacting the demand of any commodity such as cars is increase in disposable income of consumers. An increase in income of consumers is likely to increase the demand of cars and a fall in income decreased the demand for cars. Demand for any particular car depends upon the price of cars itself.

The affect of income of consumers on demand of product can be explained with the help of following graph. Suppose, consumers faces with an initial demand curve. Now, the condition of economy improves and this has impacted income in a positive way. This increase in income makes the cars affordable that increases the demand of cars. Such increase in income will cause demand curve to shift in rightward direction (Cherryet al. 2017).

A shift in demand curve is not indicative of the fact that the quantity that each individual consumer demands is altered by the same amount (Baset al. 2015). Instead, the pattern for market as a whole is captured by shift in demand curve.
 


Figure 1

Suppose, in the above graph, the initial demand curve faced by customer is D0 where equilibrium is determined at point Q. At this point, the quantity of cars demanded by consumers is 18 million at price $ 20000. Now, an increase in income of consumers will cause demand curve to shift to D1. It can be seen that at the same price, consumers are willing to purchase an increased quantity of cars and the quantity demanded increases to 20 million. Moreover, if the quantity demanded remains unchanged at 18 million, this will lead to increase in price of cars to $ 22000. On other hand, decrease inincome will case demand curve to shift inwards that is towards left side. This fall in income will cause demand for cars to decline at 14.4 million at the same price. Fall in demand will lead to increase in price of cars as per law of demand (Baumol and Blinder 2015).

Availability of financing option

Demand for a commodity usually depend on the level of income. For any normal good demand increases in line with income. Demand for necessary goods usually depends on the regular income of the individual. However, for luxury items like cars people do not always meet their demand with out of pocket expenses. Rather people go for a loan to finance such purchase. Therefore, the available financing option is an important determinant of demand in the car market. The cost of borrowing is the interest rate that has to be repay for the loan taken. A lower interest rate implies a lower cost of borrowing. As the borrowing cost reduces, is becomes a lucrative option for people to borrow funds to finance car expenses (Maurice and Thomas 2015). Consequently, rate of interest on borrowed capital has an inverse relation with car demand. Lower the interest rate higher is the car demand and vice versa.
 


Figure 2

The figure above shows the relation between interest rate and investment demand. The investment demand curve DD slopes downward. As the interest rate decreases from r1 to r2 the investment demand increase from I1 to I2. This depicts the situation of car market with favorable financing option. A decline in the interest rate indicates a favorable condition for borrower. With a reduction in the borrowing cost, people tend to take more loans to buy cars. Besides interest rate other factors of financing option that influences car demand are easy availability of loans, less complex mechanism, a relatively shorter period for getting loans and such others.
 

Price of related goods

Apart from own price, price of a commodity depends on the price of the related products classified as substitutes and complementary goods. When price of substitute goods increases, then demand for the concerned product decreases leading to a rise in the demand for substitute good. However, the relation is inverse in case of complementary goods. With increases in price of complementary good demand for both the concerned product and its substitute items decreases. A complementary product of car is petrol or diesel used as fuel in the car engines (Nicholson and Snyder 2014). When fuel price increases then people want to cut their spending on fuels. This automatically reduces car demand. In the car market, fuel price is thus an important determinant of demand. With increase in fuel price car demand reduces and vice versa.
 


Figure 3

The demand curve of car is shown as D1D1. SS represents the supply curve. E is the initial equilibrium in the car market with corresponding price P1 and number of cars sold is Q1. Now suppose, there is an increase in fuel price. This causes a decrease in car demand causing an inward shift of the demand curve. The demand curve now shifts from D1D1 to D2D2. Given the supply in the car market, a new equilibrium is attained at E1. As shown from the diagram, the new equilibrium is achieved at a lower price and a lower number of cars sold. The rise in fuel price thus leads to a contraction of car market by declining the number of cars demanded.
Number of factors such as cost of production, expected future price for cars and technological factors influences the supply of product such as cars.

Production cost-An increase in production cost is likely to have a negative impact on supply of cars and decrease in production cost positively influences product supply. Hence, it can be inferred that there is an inverse relationship between product supply and production cost. Supply of cars will be hindered if the manufacturing firm has to incur higher cost. Some of the elements of input cost that would affect on supply are wage rate, input price, taxes and regulation of government. Increase in raw material price, strict regulation of government and higher wage rate for labors have considerable impact on production cost (Ehrenberg and Smith 2016). Cost of production of cars involves incurring of entry cost prior to production and the most significant cost of entry are cost of establishing production lines and design costs. Expenses are incurred in the development and research stage of products. For efficiently manufacturing cars, organization of production line should be done and requires ordering of specialized machineries.

Production of cost is done by using the combination of materials, labor and machineries that is called as factor of production. Profit of car manufacturing firms will go up if they face lower cost of production whilst the prices of cars remaining unchanged at the same time. An increase in profit of firms motivates them to produce more goods such as cars, since more it produces, the more profit will be earned by them. On other hand, a fall in production cost of firms will make them supply increased quantity of cars at any particular price. This causes supply curve to shift towards rightward side.Higher cost of production will vase supply curve to shift towards leftward because firms intends to produce lower quantity of cars if they face higher cost of production (Stiglitz and Rosengard 2015).


Figure 4

S0 is the initial supply curve faced by firms where initial quantity of cars supplied stood at 18 million at the price of $ 20000. An increase in cost of production will cause producer to lower the total quantity of cars produced at same price and this leads to shifting of supply cure in leftward direction and accordingly supply curve shifts to S1. Now, at the same price that is $ 20000, total quantity of cars supplied reduces to 16.5 million. On other hand, a decrease in cost of production will cause decrease in total cost of manufacturing cars and this will lead to rightward shift in supply curve to S2. Increased supply is indicative of the fact that at every given price, the quantity supplied is higher.

Expected future price-If the quantity demanded for any commodity is affected by its price, and then it is certainly possible that future price of products will also influence the demand. Expectation of sellers regarding the price of products also determines the supply. Supply of cars will decrease if sellers expect higher price for cars and there is an increase in supply if suppliers expect lower price. Expectation of sellers about the price of cars is responsible for shifting the
 

Figure 5

Higher expectation will lead to shift in supply curve towards upward direction as indicated by green line and vice versa. Sellers are likely to sell more today if they expect that price of car will decrease in future.

Technological factors- Higher supply of cars can be stimulated due to improvement in technologies that leads to reduction in production cost. Technological advancement and development of new technology helps firms in lowering cost of production that lead to rightward shift in supply curve of demand (Godle and Lavoie 2016). This will enable them firms to produce higher quantity of cars at give price. An advanced and better technology affects the price of products in terms of reduced cost of production that has increases supply of products. Technological development comes with the opportunities and threat for the manufacturer of cars. For the final mile deliveries, technology is becoming widely adopted that has helped in increasing fulfillment centers requirement due to their operating limits. For the autonomous vehicles, there could be significant savings of cost due to advancement in technology. Benefits of technological advancement are attributable to reduced cost of labors, improved fuel consumption, reduced accidents and improved productivity.


Figure 6

The above graph depicts the supply and demand curve and determination of equilibrium point. Initially, the equilibrium point is E1 that is determined by the intersection of initial demand and supply curve that is S1 and D1. With the technological advancement and adoption of latest technology by the manufacturing firms, the cost of manufacturing cars is reduced as the production process becomes more efficient. This reduced cost of production increases the supply of products that is car manufacturers increases the supply of cars that leads to a rightward shift in the supply curve. Therefore, the supply curve shifts from S1 to S2. This increase in supply will cause price to fall below P1 and this price reduction will cause demand to increase. On other hand, at the same time, if there is a decline in demand that will lead to shifting of demand curve to D2. The interaction between demand and supply causes’ price to decline further to P2 and the new equilibrium is determined at E2.

The car market is characterized by oligopolistic form of market that has a large number of either small firms dominating the market that sells differentiated or identical products having considerable barriers to entry. Landscape of modern economic is dominated by oligopoly that accounts for almost half of the output that is produced in the economy. The main features of oligopoly market is that there are few sellers selling the commodity, each seller is acquainted the competitors individually in the market. Market control is attained and retained by firm in the oligopoly market through barriers of entry (asia.nikkei.com 2018). Some of the common barriers to entry in the car market are recognition of brand name, resource ownership, patents, government franchise and decreasing average cost.

Market failure is caused by usage of cars and market and failure of market occurs when the economic efficiency is not achieved by market operation. Market failure refers to a situation when the best use of scare resources is not produced by free market. Externalities are one of the causes of market failure and externalities referred to as the external benefits and costs that are incurred on the third party that does not form the part of exchange of goods and services (asia.nikkei.com 2018). Usage of cars tends to lead to failure of market that is generally demerit goods. The reason is attributable to the fact that using cars emit gases that are responsible for polluting the environment. This has the consequences in terms of imposition of costs on healthcare that do not use the cars. Market failures are caused by externalities if the full social benefits and social costs of consumption and production are not taken into account by the price mechanisms.
 


Market failure has become an increasingly important topic that results due to imperfections in mechanism of market when there is inefficient allocation of resources. Productive efficiency and allocative efficiency are the two types of efficiency that is associated with failure of market. Efficiency in production is achieved when the production is done at the lowest level of costs. Allocative efficiency on other hand is efficiency that is associated with the occurrence of resource distribution that consumers cannot be better off if the other consumers are not worst off (Stiglitz and Rosengard 2015). The externalities that are associated with car market are related to fuel combustion and emission of greenhouse gases and other are related to location, extent and timing of travel. Use and production of automobiles creates than negative externalities that are more than pollution. Several firms in the market are able to match the high demands of car population by high supply of automobiles. Other than pollution created by cars, increased usage of cars has increased urban flooding chances. This increase in urban flooding is associated with higher demand for land that is required for related car structures and parking lots due to rise in car usage. The consequence is occurrence of frequent flooding, as the earth around such areas will not be able to soak majority of rainfalls.

Negative externalities in the car market are the costs that arise from economic transactions that is negatively affecting the third parties and other groups. It is indicative of the fact that when such commodities are produced, it has the certainty of adversely influencing the third parties in terms of flooding and case pollution. With negative externalities in society, supply of car in the market is at equilibrium for the car and firm industry. The optimum of car that is demanded by customers is lower than the cost of constructing road and cars. This depicts that although the firms are producing at efficiency level of optimum level, production is not done at the optimum level of society. It has the consequence of making the system inefficient leading it to market failure. Occurrence of market failure is the impact of under and over allocation of resources. In this particular situation, market failure occurs because of flooding is caused by over allocation of cars and roads that results in market failure (Valentin 2017).

The marginal social cost is greater than private marginal cost when there is existence of negative production externalities.


Figure 7

The situation of market failure in car market can be explained by above graph. Market failure is associated with negative externalities that arise from car usage such as pollution in terms of emission of green house gases and flooding.

The above graph depicts that optimum equilibrium is not equivalent to firms’ equilibrium point. The marginal private cost is more than margin social cost that is indicative of the fact that roads and cars are being over allocated. Such over allocation leads to existence of external cost as shown by arrow in between the curves of two costs. It is the intervention of government and efforts taken for shifting optimal cost curve closer to marginal private cost (Johnson 2015).

Government can control the market failure and can bring the private marginal cost closer to optimum cost level. One of the measures that can be taken by government is taxing firms that manufacturer cars. For prevention of flood occurrence and pollution caused by using cars, government can tax the construction roads. Car production will decrease if the firms that manufacturers car and construct cars are taxed by government. Incurring tax would increase the price of cars. However, the amount of tax that is incurred is depending upon the commodity itself. Range by which marginal private cost will shift also depends upon the amount of taxation. Amount of taxation is determined by matching the amount of taxation to the external cost that is equivalent to cost curves. When the car industry is taxed, there will be lower production of cars that will lead to reducing the causes of air pollution and thereby reducing air pollution. It is so because all the sellers and buyers of cars will be required to reduce the amount of pollution in the air. Furthermore, government can prevent flooding on roadby building fewer roads and ultimately making production of road more expensive. This will in preventing flooding on road because road will be covered by less natural roads (Valentin 2017).


Figure 8

The above graph depicts the impact of imposition of tax production or manufacturing of cars. Imposition of taxes on roads and cars will cause supply curve to shift towards the left. It can be seen that optimal cost is much closer to marginal private cost when compared to first graph. Overall amount of external cost has reduced.
Another measure that can be taken by government for reducing negative externalities caused by car market is to subsidize owner of land selling their lands to firms that intend to build road. Supply of land will be closer to optimal level of society or might shift to society optimal level if the landowners are subsidized by government (Johnson 2015). Such shifting would lower the amount of amount of roads that are built. Since, cars and roads are complementary goods, lowering the amount of roads built will lower the total number of cars that are manufactured. Ultimately, there will be lower amount of flooding as the road water will be soaked up in a natural way that are created by rainfall.

Therefore, it can be said that imposition of taxation on negative externalities created by car market would help in overcoming the market failure that is caused in the oligopolistic market structure.


Figure 9

The main intention behind the imposition of tax by government on negative externalities is to make consumers and producers to make payment of full social cost of the good. It will help in creation of outcome that are more socially efficient and reduces consumption. If there is no imposition of taxation, goods having negative externalities will lead to over consumption at quantity Q1 where demand and supply is equal. Taxes on cars should be imposed equal to the amount of external marginal cost. It is indicated that consumers will pay full social marginal cost. Amount of output will fall to Q2 from Q1 after the implementation of tax. Output level Q2 is regarded as socially efficient as at this point social marginal cost will be equal to social marginal benefit.
 
Large cities in Asia have unique transportation problems and in most part of South-East Asia, there is continuous increase in demand of cars.

This increase in road congestions makes national government in dilemma for promoting sustainable urban transport. Cars are one of the transports that are responsible for urban congestion that cannot be alleviated by traffic management and road building. During 2017, sale of vehicles in South East Asia is set to outpace all other regions of world that has highlighted swelling economic expansion. It is perceived that traffic jams would be stifling in major cities such as Jakarta, Manila and Bangkok due to growing number of trucks and cars in urban centers. This has resulted in urgency for upgrading much needed transport infrastructure throughout much of region. The government of biggest economy of South East Asia intends to modernize railways and roads as a part of wide ranging infrastructure. Upgrading of infrastructure is complemented by several forms of reform intended to make business doing in Indonesia less bureaucratic and less complicated (Valentin 2017).The up gradation of public transport such as developing new metro line is likely to offset daily jam faced by residents of Jakarta. Moreover, a new rail route is constructed by government of Jakarta that would that would link it to International airport to the west of city.

Problem of urban traffic congestion can be alleviated by several measures. Such measures can be classified and identified at the conceptual level into three broad categories. In first category, government that would address the supply side of transport facilities should take measures. Secondly, efforts should be done for managing demand side by utilizing existing transport facilities efficiently. Thirdly, measures should be taken for developing urban structures and making improvement in physical integration between amenities, employment and housing (Marciano and Medema 2015).
 

Demand and Supply side factors of congestion

Some of the root causes of congestion in terms of supply factors are shared use and infrastructure. Infrastructure involves level crossings, bottlenecks, management of access to highways and freeways and traffic lights. Shared use involves share use of roads with parking and trams at certain time during day. Demand side factors leading to road congestion are accessibility, economic growth, urban patterns, and peak period and price signals. Rapid growth in personal travel, business travel and in road freight has elevated economic growth. Peak period is about high usage of cars for both education and work in peak period trips. In some areas of country such as Singapore, poor accessibility to alternatives in some areas is witnessed in some areas. Unemployment and urban settlement pattern along with low density land use. Absence of direct connection between traffic conditions and cost of using roads and underpricing usage of roads are some price signals impacting congestion in terms of demand side.
 
Figure 10

With increase in price of using road is likely to reduce the demand for road space attributable to substitution and income effect of higher price. The above graph depicts congestion as an external cost to consumption in the standard case where marginal social cost is equal to marginal social benefits.

Policies to reduce Traffic congestion

Traffic congestion can be reduced by undertaking of several steps by government that incorporates reducing demand, increasing supply of road space and increasing price.


Figure 11

Government can increase road supply by building more roads. However, with increase in road space cannot eliminate congestion but encourages drivers to drive.
Another measure that can be adopted by government is road-pricing system by charging usage of roads. In Singapore, road pricing are used when drivers are charged for accessing road and electronic detectors are placed on bridges.
 


Figure 12

Transportation Policies in East Asian Countries

Different demand and supply side policies are taken by the government to reduce car use in order to control road congestion. This section discusses two of such policies and its consequences.

Public transport development policy in Malaysia

Management of travel demand is an important aspect to be considered while addressing the issue of road congestion. In order to reduce use of private cars it is necessary for a nation to develop alternative means of transportation. An alternative to private vehicles is the use of public transport. Malaysia though has achieved a sustainable rate of growth; it stills lags behind in providing an efficient public transportation system to Malaysian citizen. People in Malaysia uses cars not only out of their choice always but also because of they there is no rail or bus route available nearby their house (Rodrigue, Comtois and Slack 2016). Therefore, Malaysia has focused on development of public transportation system to solve the problem of road congestion.

Statistics for public transport in Malaysia

In Malaysia usage of private transportation, especially private cars dominate the use of public transportation mode. Usually the higher proportion of car ownership is taken an indicator of high quality of life. However, in Malaysia private car has become a necessary means of transport to travel to desired location. Nearly 84% household own cars in Malaysia. This ranks third in the world. Malaysia in terms of car ownership is ahead of Germany and South Korea having 83% ownership, Japan with an ownership of 81% and Britain having 74% ownership (thestar.com.my 2017).


Figure 13

(Source: Khoo and Ong 2015)

The above figure shows the statistics for registered vehicles in Malaysia. As shown from the graph registration of private cars dominates all other categories of vehicles. This is followed by Motorcycle registration. The public transport is significantly lower than other vehicle categories. This explains the reasons behind increasing concentration of private cars and road congestion.


Figure 14

(Source: Khoo and Ong 2015)

The above chart shows a comparative analysis of vehicles usage between 2000 and 2010. The use of public bus is considerably lower in 2010 than that in 2000. As against this, car usage has increased considerable between these two years.

Therefore, the public transportation should system should be developed to reduce the usage of private cars and traffic congestion.

Steps take for improving public transportation system

The government of Malaysia has established the goal of improving the public transportation system in urban areas as a core policy strategy to boost economic growth and relieve citizen from traffic congestion. To fulfill this objective government has allocated funds that worth up to 180 billion RM for investing in public transportation system (nst.com.my 2016). Government has taken steps to stand with their commitment. Approval has been given for large-scale projects like MRT Line 2, LRT 3, and Bus Rapid Transit (BRT) on the highway and High Speed Rail network. Several policies have been undertaken to improve the public transport service. Some of these policies are discussed below.

Enhancing urban connectivity

Development of infrastructure and improving capacity are the main strategy in LPT transportation planning. With 75% urban expected growth rate it has become increasingly important to improve connectivity across regions. The National Urbanization Policy outlines a settlement hierarchy to achieve this objective. Growth of conurbations requires sufficient infrastructure is needed that can link the areas with the conurbations. Network planning is a part of this strategy. This is to establish bus network in most of the cities and adequate coverage areas for bus services. In addition to bus service, focus has also been given on improving railway schemes in urban areas (gabungankiri.org 2018). There is limited scope for expansion of bus network because of population density and already over-burdened roads. Therefore, rail network has been strengthening to supplement bus network in the nation.

Development of rural and inter-city connectivity

The policy takes into account the fact that inter-regional linkages are important for supporting national aspiration. In this regard, steps are taken to develop regional rail system, improvement of express bus service and strengthen rail and bus network in rural areas (Zailaniet al. 2016).

Improvement in route planning

The schemes realize that public transportation system should not be limited to urban areas only but it should cover rural and regional areas as well. Effort has been made to link rural areas to the entire city. Route planning is to be made in a comprehensive way. Strategy has been taken to rationalize route and accessibility indicator has been developed to monitor planning and designing of new transport mechanism (malaysiakini.com 2017). The policy ensures that all segments of population have served equally.

Providing public transportation at an affordable price

In order to shift travel demand toward public transport, fare should be affordable. Lessons are taken from past-experiences and service model has been developed keeping in mind the environment sustainability that is suitable to the mode and the locality. Fare policies has been reviewed to improve the fair structure and delivery models have been developed for various modes.

Economic implication of the policy

Demand for a commodity depends on several factors. In addition to own price, a number of factors influences demand. Price of related goods is one such factors that affects demand. Price of substitutes and complementary goods affects demand in opposite ways (Arrow 2015). For travel demand, public transport works as a substitute to private cars. The increased demand for different modes of public transport means declining demand for private cars and hence, reduction in road congestion. The following supply-demand framework can explain this

Figure: 15

The figure above shows the Effect of public transport development on private cars and road congestion. DD shows the demand for private cars and SS reflects the supply of private cars. With poor public transportation system, P1 is the price for private cars and Q1number of cars sold in the market. Now, with improvement of public transportation system because of improvement of service quality and increasing connectivity the demand for public transportation increases. When people substitute private car use by means of public transport then demand for private car would decline. As a result, the demand curve shifts inward from DD to D1D1. This causes a decline in number of private cars from Q1 to Q2. With reduction in number of private cars, the resulted road congestion will decline.
 

Policy of import tariff in Malaysia

Restriction on demand alone cannot solve the problem of road congestion. In addition to demand side policies supply side policies needs to be taken to solve the problem of road congestion. Imposition of sales tax on vehicles is an effective policy to restrict supply of vehicles. Car manufacturing cost is not same across all the countries. The technologically advanced countries can produce cars at a relatively low cost. Many of the Asian countries import cars available at cheap price. The imported cars along with domestically produced cars increases supply of cars in nation. When cars are available at a relatively low price then middle income household can afford cars easily. As more and more people purchase cars, road congestion increases. To address this issue, many Asian countries have imposed an import tariff on imported cars. One such nation in Asia is Malaysia.

Imposition of import tariff has made cars very expensive in Malaysia. Because of heavy import tax, cars have become very costly in Malaysia. In Singapore, cars are most expensive and in the second place is Malaysia (Schüller et al. 2017). The import tax structure on vehicles in Malaysia is given below.


As shown from the table, the import duty is same irrespective of engine capacity. The duty rate is flat 30%. The local tax or exercise duty on the other hand increases progressively along with Engine capacity. For capacity less than 1800 CC, the tax rate is 75% and the highest exercise duty is for engine capacity above 2500 CC. The import duty is lower for category called complete knock down as compared to that for complete built up (Thoburn and Natsuda 2017). In car manufacturing industry knock down kit refers to a kit that contains components that are necessary to assemble a product. These parts are produced in one nation or region and then are imported by some other nation where the final assembly is done. Completely knock down (CKD) kit is a common name for kit having all the non-assembled parts. It indicates a method for supplying subparts to the market particularly those shipped from one nation to another. CKD is a common practice in automotive industries like bus, heavy truck and others (Sang and Bekhet 2015). The import duty on CKD is 10% as against 30% for completely built up products.

For cars other than passengers’ vehicles, import duty on CBU is same rate of 30% as that for passengers’ cars. For motors having energy capacity less than 1800, no import duty is applied on complete knock down (CKD) kit. Exercise duty and GST are the local taxes imposed on vehicles. The GST rate is flat 6% for cars with different engine capacity (Islam et al. 2016). The lowest exercise duty is at 60% for engine capacity less than 1500. The highest rate of exercise duty for this category is 105%. This is same as that for passengers’ cars.

Economic evaluation of the policy

The policy of import duty raises price of cars in Malaysia. This works in the same of as tax of sellers does. This is described in the following figure.

The figure above describes impact of taxes on the supply of car market. DD and SS give the demand and supply condition in the car market respectively. The imposition of tax raise price paid by the buyer from P* to PB. However, sellers are not benefitted from this increased price paid by the buyers. The effective price to sellers reduces from P* to PS. The price difference between buyers and sellers is equivalent to the imposed tax rate. As the imposed tax reduces price to sellers they lose interest on importing cars. Because of import duty on CKD, the cost of assemble part increases. This raises the production cost shifting the supply curve to the left (Ashwin, Taylor and Mankiw 2016). As shown in the above figure, the supply curve shift inward by the tax amount. The car market contracts with a decline in car supply. The imposition of import duty thus is expected to reduce road congestion by reducing availability of cars on roads.

Consequences of the policy

As a combined effect of import duty and local taxes in the form of exercise duty and GST, price of Cars in Malaysia is much higher as compared to that in other nations. The table below shows the price difference of Toyota Camry in USA, Thailand and Malaysia.

The table above shows the impact of a 30% import duty on imported vehicles from countries not originating in Asia. Car prices in Malaysia are increased by the local tax and imposed exercise duty. As per Malaysian Automotive Association, the exercise duty on car constitutes top 10% of the sales tax. The imposed import duty generates a considerable revenue for the government (Natsuda and Thoburn 2014). As per the revenue estimation of Federal Government in 2014, the collected import duty from Motor cars have increased in 2013 to RM 2417 from RM 2,282 million in the previous year.
 

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