The Welfare Effects of the Scenarios

Table 7.2 and 7.3 present the estimated welfare change of the policy scenarios in term of price indices. The price index lower than 100 indicates a cheaper price, and thus a welfare gain for the Households well being. The index 100 indicates an unchanged well being.

Otherwise, it indicates a welfare loss for corresponding households. Based on these indices, it can be assessed as follows.

Scenario 1

1. The elimination of import duty on the imported rice has relatively similar welfare effects across different income groups of household in rural as well as urban areas, both in the direction and magnitude of change. That is, it will increase the purchasing power of all households across income groups and areas with an increase ranging from 10 per cent (by the rural households in the higher income group) to 19 per cent (by the rural households in the middle-income group). By referring to table 7.1, it appears that the magnitude of welfare impact on the households correlates with the budget share of the corresponding food group at the base line situation. For example, the rural households in the middle-income group have a weekly average of budget share on rice as much as 25 per cent, the biggest budget share among the observed household groups. The welfare effect corresponding to the scenario 1 on those of this group is the highest, namely, 19 per cent gain of purchasing power. Since the household with the higher income consumes rice less percentage of their food budget, the impact on them is also less.

2. A comparison between the urban and the rural areas gives no conclusive picture with respect of the welfare effect induced by this scenario. Among the higher income households, the gain from this policy scenario is greater in rural area than that of urban area. Meanwhile for those belong to the lower and the middle income groups the gain is higher in rural than in urban areas The difference of the welfare effect among income

121

groups is more extremely seen in the rural area, than in the urban. In all, an elimination of duty on imported rice brings about gain to households.

3. While the effect is positive for the households, this policy however, will likely be objective by rice farmers, the likely looser of this policy. But, if this policy is accompanied by a well managed direct or indirect income transfer to the farmers to protect them from declining rice price, this combination of policy may be beneficial for all. Compared to the current general support price (which tends to create an urban bias), a well managed income transfer may be less costly to the government in term of fiscal burden. Income transfer to the farmers, though previously not commonly implemented, is at the moment being thought of as an alternative measure, especially to mitigate the crisis impact on the farmers. Thus, its implementation is likely allowable and accepted by domestic politicians.

Scenario 2:

1. Tables 7.2 and 7.3 exhibits gains of purchasing power for all income groups. It is exhibited that the urban households gain better than their counterparts in the rural. This may be caused by the fact that the budget shares for tobacco and betel of those who are in urban area are larger than the budget share of tobacco and betel of those who are in rural area.

2. Compared to the welfare change induced by the scenario 1, the welfare change induced by this scenario is not obviously different. At the other side, this scenario may bring revenue to the government. So, besides the gain enjoyed by consumers, this scenario bring also gain to the government. The elimination import duty and imposition of ―sin tax‖ for tobacco and betel group brings mostly gain, with small loss suffered by households. Thus, it may be a good policy option to implement.

Scenario 3

For this scenario, welfare change exhibits losses for most of households across income groups and areas. The highest loss is suffered by households of rural- low income group, urban-low income group, and rural middle income group who should afford 19 %, 15 % and 14% more budget respectively for them to stay at the same well being as before the

122

imposition. It is shown, that the imposition of the tobacco tax does not help much, at least from the perspective of consumer households.

6 Concluding Words

It is shown that demand estimates derived from the LA/AIDS model in combination with price index concept may be used to measure a welfare change of pricing policy option. The results are useful for policy makers, policy analyst and consumer interests. Three policy scenarios exercised in this assessment are,

1. the elimination of duty on imported rice leading to a decrease of rice price by 30 per cent,

2. the above option is combined with the imposition of tobacco‘s ―sin tax‖ that lead to rice price decrease by 30 per cent and an increase of tobacco and betel price by 40 per cent, 3. The imposition of import duty on imported rice combined with an imposition of

tobacco‘s ―sin tax‖ that lead to 40 per cent price increase.

If the first scenario is implemented all private households across the income groups and areas may receive benefits from the decreased market price of rice.

If the second scenario is implemented most of households gain benefits. Households in urban area will benefit better than those in rural area.

If the combination of import duty and the tobacco tax is implemented the larger loss of purchasing power will incur to the household from lower income group in rural area.

7 Notice

In this assessment, the demand models of different income groups are assumed to have the same pattern of consumption, as they are represented only by one model. This may be misleading, because each income group might have a unique consumption behavior that requires a different treatment for each. However, this results support the proposition, that tarification for households to pay more for the same good of the same quality.

123