As it has been done for decades, the government pledges that the national economy is no longer capable of subsidizing the imported goods. Consequently, this is one of the factors that inflate retail prices.(Ravsberg, F 2012)
A 240 percent sales tax was imposed on products sold in hard-currency stores since 1990 when Cubans were empowered to use dollar. The poorest members of the population are subsidized using the money from tax and this was the way to reallocate incomes.(Ravsberg, F 2012)
The cost of a small amount of soybean cooking oil is currently equivalent to the salary of several days of work. It is due to the reduction and elimination of subsidies by government. Citizens of Cuba need to spend on goods with 240 percent taxes imposed. (Ravsberg, F 2012)
In economic view, this can bring changes in demand. Without subsidies, the price of goods changes and literally increases. In this situation, consumers’ income influences the demand. When income decreases, consumers buy less of most goods; and when income increases, consumers buy more of most goods (Parkin, M 2012). Hence, if there is no change in the income, consumers’ purchasing power will also reduce when the price of good rises. The 240 percent of taxes imposed on goods can worst off the consumers as it burden their expenses without government’s subsidies on taxes of products.
The shopkeepers also added “fines” to goods. There are imported goods that cost up to five times more as compare to the cost in their countries of origin.(Ravsberg, F 2012)
In economic view, the shopkeepers charged additional to maximize its profile from the sales. It is also to boost up the business revenue. However, a low-income consumer could not afford to purchase expensive goods which known as the luxury goods (Parkin, M 2012). The poor Cubans could not afford to purchase goods that cost 500 percent more than in their origin countries without the government subsidies. The rich Cubans may spend for any goods without tax subsidies by government, but not the poor.
The government promulgated about price leveling on 100 indispensable items lately to refrain and prevent theft against consumers. It means all hard-currency stores have to sell those goods at exactly same prices. (Ravsberg, F 2012)
In economic view, this will better off the consumers because consumers can now enjoy purchasing good without the additional “fines” by shopkeepers. The poor Cubans do not need to be burden by overpriced goods. On the other hand, this condition will worst off the shopkeepers. The shopkeepers will have to sell at lower price as compared to the price they are selling previous including the “fines”. Therefore, the shopkeeper’s profit will decrease.
To make the reallocation of wealth successful, taxes should be applied on good that are not a necessity for living which is the luxury goods. Imposing taxes on milk, cooking oil, meat and soap can be considered as a punishment against the poverty-stricken community and the poor. (Ravsberg, F 2012)
In economic view, this is benefiting the whole society and citizens in Cuba. If the staples are tax free, the poor Cubans can afford it and it will ease their living. Hence, the demand for staples will increase as everyone can own the goods in low price. As for luxury goods, even though with taxes imposed, the rich and fortunate people in Cuba will also demand for it as they have strong income. The amount of tax applied on luxury goods does not affect the purchasing power of the wealthy group.(Parkin, M 2012).
There was also one complain regarding the scare of detergent in the hard-currency stores. Only large packages were being sold was the problem, as the fact is that small packets detergents are what many Cubans could barely manage to owned. (Ravsberg, F 2012)
In economic view, the producer should supply different sizes of detergent to achieve consumer’s demand. The sales of small packets will also generate profit to the shopkeepers and producer as there is a market for the poor Cubans. Detergent is to be as one of the necessity; therefore, there is always a demand by all citizens regardless the rich or the poor.
As to ameliorate the circumstances in Cuba, the Council of Ministers should decide to raise taxes only on luxury goods as well as assuring the lowest probable prices for staples. (Ravsberg, F 2012)
In economic view, it will be a wise choice for the Council of Ministers to only raise the tax of luxury goods. It is because a low price staples can ensure a stable living for the poor Cubans and they will not be discriminate. Inflated retails price is always a burden for the poor Cubans.
References
Parkin, M 2012, Economics, 10rdedn, Pearson Education, p.8, 60, 67
Ravsberg, F 2012, Prices and Taxes in Cuba, [Online], available:
Article 2
The price of gasoline strikes an unheard-of average high in California of $4.61 a gallon fueled by a reduced supply and a volatile market. Some station owners even shut down pumps. According to the AAA report, the average price for a gallon of regular unleaded across California had an increase of 47 cents as compare a week ago. This happen in the state with most expensive fuel which is The Golden State leapfrogged Hawaii. (Associated Press, 2012)
Nancy Garcia, a Honda Accord’s owner said that she could afford to fill her tank as the price of $4.65 a gallon for a regular grade is a high price for her. (Associated Press, 2012)
In economic view, the purchasing power of Garcia will decrease when the price of goods increases. Garcia as a consumer will worst off due to the increased price of gasoline as the new price can burden her expenses. As relate to income effect, when one faced with higher price and with an unchanged income, one cannot afford to spend on or buy things they previously spend on or bought. (Parkin, M 2012). In this situation, the demand for big cars and expensive cars that require more fuel will decrease while the demand for economical cars will increase. Consumers can choose to give up luxury cars and go for economical cars to reduce their spending on gasoline.
In addition, economist views the choices that consumers make as rational. A rational choice is one that compares cost and benefits as well as a logical decision that provide them with greatest benefits. (Parkin, M 2012). Rational choice theory is also a logical decision that provides one with the greatest benefit. (Investopedia, 2012). It is rational for consumers can look for substitute good. A substitute is a good that can be used to replace another good. (Parkin, M 2012). For instance, the substitute for cars can be public transport, bike or walking with foot to destination. Other than that, it is also rational for the consumers to sell away expensive car and consume less fuel because if consume fuel less, the consumer still have the purchasing power to buy other necessity things. Similarly, if they continue spending on high price fuel, their purchasing power for necessity or other goods will decrease.
The wholesale price increases when the supplies drop. In order for station’s owner and distributor to fill up their station’s tank, they would have to pay more. Hence, the prices are increased based on how much they paid for their existing inventory, amount they deem they might have to pay for their coming shipment, and the prices their competitors are charging.
In this case, we can see that the supply decreases when the price of a factor of production rises. The demand for gasoline will decrease when the price increase. Consumer will rather spend less than to spend for the same goods with expensive price. Nevertheless, if the supply decreases to a point where demand exceeded supply, shortage can occur. A shortage forces the price to increase. Simultaneously, if the supply is more than demand, the surplus occurs and it can force the price to go down. (Parkin, M 2012).
The national average was about $3.81 a gallon, the highest for this time of the year. However, in other states, the gas prices have started to decrease for October. The power outage at Southern California causes this dramatic surge of gas prices. A senior petroleum analyst, Patrick Dehaan, predicted that the price can peak as high as $4.85. (Associated Press, 2012)
According to AAA, the price of diesel fuel also had also increased. A spokesman for the California Trucking Association, Michael Shaw claimed that it is not easy to operate in this environment. It is because the quick raise of prices makes it hard to take on new contracts and plan ahead. The increased in the price of diesel had added significant costs for truckers who regularly pump hundreds of dollars of fuel to their tanks. The analysts said that a web of refinery and transmission problems is to blame. (Associated Press, 2012)
It can be analyzed that the increase of diesel price affects the co-workers that uses diesel vehicles. With the new price, the truckers may face circumstances where he could not support themselves and their family members anymore. As relate to income effect, when one faced with higher price and with an unchanged income, one cannot afford to spend on or buy things they previously spend on or bought. (Parkin, M 2012). Consequently, consumers will take steps to reduce their gas expense. Consumer might have to put in less, as in a quarter-tank and neither a half tank nor full tank.
However, there was also good news. Exxon Mobil Corp said that the refinery in Torrance get back to normal operation. The state officials remark the prices will start falling as soon as the refinery coming back online. (Associated Press, 2012)
When the price is at the point which there is no longer a shortage or surplus, the price comes to rest at its equilibrium. (Parkin, M 2012). Consumers will better off when they do not need to spend at higher price for the goods. At the same time, producers are also better off as they can produce and supply as usual without anxious about the cost.
The co-owner of the Coast Oil Fuel distributorship, Mark Mitchell, stressed that none of his gas station shut down even though several station owners had talk over it. The station has to charge approximately $4.89 to break even when spot prices hit the summit. Mitchell also appealed that he is not going to sell excessive when the price increases 40 cents in a day. (Associated Press, 2012)
In short, the co-owner is willing to sell to break even, which earns no profit and make no losses. Hence, if the price rises continuously, the demand for it will decrease. This literally leads to pull down gas station’s business and the business makes no profit.
References
Associated Press 2012, Gas Prices Hit All-Time High, [Online], available:
Investopedia 2012, Rational Choice Theory, [Online], available:
Parkin, M 2012, Economics, 10rd edn, Pearson Education, p.8,57,67
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