Pradiptyo, Rimawan and Sahadewo, Gumilang Aryo (2012): A growing pain: an experimental approach to discover the most acceptable strategy for lifting fuel subsidy scheme in Indonesia.
Download (454Kb) | Preview
Fuel subsidy has been the biggest quandaries in Indonesian economy, as it has been creating a huge opportunity costs to the economy. The subsidy is implemented to a consumer good (i.e. fuels) as oppose to targeted recipients, creating distortion in the efficient resource allocation. It was estimated about 70% of the subsidy were received by 40% of top income households (World Bank, 2007). Although the budget plan for the subsidy in 2011 was Rp129.7 trillion or 10% of the GoI annual budget, the actual subsidy was Rp160.7 trillion (13.3% of the GoI annual budget).
Indeed, no individual prefers to lose the subsidy that has been received for many years, however the Government of Indonesia (GoI) cannot maintain the subsidy policy on fuel price any longer without creating extra budgetary burden. This study use experimental approach to seek the most acceptable exit strategy of eliminating fuel subsidy scheme in Indonesia based on households’ perspective. 335 subjects participated in the experiment, ranging from those who do not own motor vehicle, those who have motor cycle(s) and those who have car(s). During the experiment, subjects were given several pair-wise choices and chose the most acceptable policy from each pair-wise policy choices. The results show that the combination of gradual elimination and earmarked reallocation scheme were the most desirable. Subject with very low and low-income background tend to be more receptive for sudden elimination of the subsidy in comparison to their counterpart from medium and high-income backgrounds.
|Item Type:||MPRA Paper|
|Original Title:||A growing pain: an experimental approach to discover the most acceptable strategy for lifting fuel subsidy scheme in Indonesia|
|Keywords:||Fuel subsidy, experimental economics, analytical hierarchy process (AHP), preference relation, reallocation of resources|
|Subjects:||D - Microeconomics > D0 - General > D03 - Behavioral Economics; Underlying Principles
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Rimawan Pradiptyo|
|Date Deposited:||03. Mar 2012 19:15|
|Last Modified:||11. Feb 2013 23:23|
Adenikinju, A. (2008), Energy Pricing and Subsidy Reforms in Nigeria, University of Ibadan Nigeria, retrieved January 2012 from www.oecd.org/dataoecd/58/61/42987402.pdf
Asian Development Bank (2010), Clean Technology Fund Investment Plan for Indonesia, Asian Development Bank, downloaded June 22nd 2011 from www.adb.org/Documents/Reports/Others/INO-CTF-Investment-Plan.pdf.
Beaton, C. and L. Lontoh (2010), Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, International Institute for Sustainable Development, downloaded June 22nd 2011 from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf.
Centers for Disease Control and Prevention (2011), CDC Vaccine Price List, retrieved October 2011 from http://www.cdc.gov/vaccines/programs/vfc/cdc-vac-price-list.htm
Coordinating Ministry for Economic Affairs (2008), The Government’s Explanation on its Policy in Fuel-Subsidy Cuts and Accompanying Policies, Coordinating Ministry of Economic Affairs.
Coordinating Ministry for Economic Affairs and Bank Indonesia (2011), “Indonesia Economic Observation 2011-2012: Membangun Sinergi untuk Menghadapi Gejolak Ekonomi [Indonesia Economic Observation 2011-2012: Synergy to Challange Economic Fluctuations], Coordinating Ministry of Economic Affairs.
Dillon, H., T. Laan, and H. Dillon (2008), “Biofuels - At What Cost? Government support ethanol and biodiesel in Indonesia,” Global Subsidies Initiative, Geneva: International Institute for Sustainable Development, Retrieved November 2011 from GSI: http://www.globalsubsidies.org/en/research/biofuelsubsidies-indonesia
Debt Management Office (2011), Perkembangan Utang Negara: Pinjaman dan Surat Berharga Negara [Developmet of National Debt: Loan and Government Bond], Ministry of Finance of Republic of Indonesia.
Frederick, S., G. Loewenstein, T. O’Donoghue (2002), “Time Discounting and Time Preference: A Critical Review,” Journal of Economic Literature 40, 351-401.
Friedman, M. (1957), A Theory of the Consumption Function, Princeton, NJ: Princeton University Press.
Granado, J.A.D., D. Coady, and R. Gillingham (2010), “The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries,” IMF Working Paper, WP/10/202.
International Energy Agency (2008), Energy Policy Review of Indonesia, Organisation for Economic Co-Operation and Development.
Kahneman, D., J.L. Knetsch, and R.H. Thaler (2008), “Chapter 100: The Endowment Effect: Evidence of Losses Valued More than Gains,” Handbook of Experimental Economics Results, Volume 1.
Kahneman, D., Knetsch, J. L. & Thaler, R. H. (1991). Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives, 5(1): pp. 193-206
Kahneman, D., J.L. Knetsch, and R.H. Thaler (1990), “Experimental Tests of The Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, 1325-1348.
Kahneman, D., & A. Tversky (1979). Prospect Theory: an Analysis of Decision Under Risk. Econometrica 47, 263–291.
Knetsch, J.L. and J.A. Sinden (1984), “ Willingness to pay and Compensation Demanded: Experimental Evidence of an Unexpected disparity in Measure of Value,” Quarterly Journal of Economics 99, 507-521.
Laibson, D. (1997): ‘‘Hyperbolic Discounting and Golden Eggs,’’ Quarterly Journal of Economics 112, 443-477.
Ministry of Energy and Mineral Resources (2010), Laporan Akhir Tim Subsidi Jenis BBM Tertentu [Final Report: Specific Fossil-Fuel Subsidy Team], Ministry of Energy and Mineral Resources.
Ministry of Finance (2010), Data Pokok APBN 2005-2010 [Basic Data of National Budget of Revenue and Expenditure 2005-2010], Ministry of Finance.
Modigliani, F. and R. Brumberg (1954), “Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data,” In Kenneth K. Kurihara, ed., Post Keynesian Economics, 388-436. New Brunswick, NJ: Rutgers University Press.
Nwachukwu, M. and H. Chike (2011), “Fuel Subsidy in Nigeria: Fact or Fallacy,” Energy, 36.
Romer, D. (2006), Advanced Macroeconomics, 3rd Edition, NY: McGraw-Hill Irwin.
Rosen, H (2010), Public Finance, 9th Edition, McGraw-Hill Higher Education.
Saaty, T.L. (2009), “An Essay on How Judgment and Measurement are Different in Science and in Decision Making,” International Journal of the Analytic Hierarchy Process 1, 61-62.
Saaty, T.L. (2008), “Relative Measurement and Its Generalization in Decision Making: Why Pairwise Comparisons are Central in Mathematics for the Measurement of Intangible Factors The Analytic Hierarchy/Network Process,” RACSAM 102, 251-318.
Samuelson W. and Zeckhauser R. (1988) “Status quo bias in decision making”, Journal of Risk and Uncertainty, 1: 7-59
Sato, Y. (2009), “How to Measure Human Perception in Survey Questionnaires,” International Journal of the Analytic Hierarchy Process 1, 64-82.
Thaler, R. (1980). “Toward a positive theory of consumer choice”. Journal of Economic Behavior and Organization, 1, 39-60.
World Bank (2011), “Indonesia Economic Quarterly: Current Challenges, Future Potential,” World Bank.