Economics Macro commentary

2. Cut on maintenance cost:

34% of the fare income is spending on maintenance of the ferry, and a high part of the income is spending on spare parts. Cutting down on maintenance cost would affect the safety of the customers. People would not like to travel by ferry which would decrease the demand further.

Other than high operation costs, Ferry operators are also uncertain about they future services as land substitutes (bridge) might cause the demand of ferry to decrease further.

The ferry worker’s unions (trade union) are demanding for an increase in minimum wage (P2) because prices of basic commodities have soared. However this would further increase the operations cost to the ferry operators thus ferry operators are asking the government to suspend the minimum wage hike.

Subsidy is a payment made by the government to the producers of good and services. With the government offering subsidy there is an outward shift of the supply curve as shown in Figure 1 to the right. This causes an increase in the quantity supplied from Q1 to Q2 which also results in a decrease in the equilibrium price from P1 to P2. With the decrease in price Ferry will now be able to compete with its upcoming land substitute.

The ferry as of now has an inelastic demand as ferry is the only mean of transport form Kamal route to Madura; if there is a small amount of increase in the price of the ferry prices, the quantity demanded will decrease less than proportionately.

Elasticity measures the responsiveness of the quantity demanded of a good or a service if there is variation in its price. The ferry operators face further uncertainty as the land substitute is likely to open soon and if the fares of the ferry keep on increasing then people are likely to switch to the Suramadu Bridge, causing the demand to be elastic.

However, if the government allows subsidy it has to take into consideration the “opportunity cost” the next best alternative forgone when an economic decision is made involved. In the long run, producers would have to decrease their fares as more substitutes would be available and if ferry prices are high then people are likely to switch to other mediums available.  All the four parties (i.e. the producer, trade union, the government and consumers) should decide and come to a common conclusion about the solution of this problem where everyone’s demand is satisfied.

If the government doesn’t provide subsidies Ferry operators are likely to increase ferry fares this would cause the demand to decrease, thus causing unemployment. Here the producers aren’t satisfied as demand is low (low profits), trade unions because workers are being laid off, government isn’t satisfied as there is unemployment in the economy and consumers due to high ferry fares.

If the government provides subsidy operational cost would decrease, thus decreasing prices of tickets. As prices of tickets decrease the consumers are likely to benefit and demand is likely to increase, workers might not be laid off and trade union’s demands too will be satisfied. If only providing subsidy can satisfy all the demand the government should provide subsidy. However it should consider the opportunity cost involved in providing subsidy.