The government of Indonesia subsidizes the retail sales of petrol (branded as Premium), kerosene, and diesel (branded as Solar) to consumers, small businesses, and transport operators. As the price of oil increases, the fuel subsidies have grown to one of the largest items in government expenditure.
In June 2013, the government raised the price of Premium from Rp 4,500 per litre to Rp 6,500, and the price of Solar from Rp 4,500 per litre to Rp 5,500.
Indonesia's national oil company, Pertamina, is the exclusive retailer of subsidized fuel. Pertamina also sells non-subsidized fuel, including higher grades of petrol, brand as Pertamax. Competitors, such as Shell, which opened its first retail station in Karawaci, Tangerang, sell only non-subsidized fuel.
Table 1: Pertamina: Sales volume (million kilolitres)
Product
2010
2011
2012
Subsidized Premium
22.92
25.50
44.96
Subsidized kerosene
2.35
1.70
44.96
Subsidized Solar
12.95
14.50
44.96
Non-subsidized fuel
21.54
22.91
19.92
Total
59.76
64.60
64.88
Suppose that, before the cut, the government subsidy for Premium was Rp 3,000 per litre. Calculate the effect of the cut in subsidy on consumer welfare and government expenditure.
The government of Indonesia subsidizes the retail sales of petrol (branded as Premium), kerosene, and diesel (branded as Solar) to consumers, small businesses, and transport operators. As the price of oil increases, the fuel subsidies have grown to one of the largest items in government expenditure.
In June 2013, the government raised the price of Premium from Rp 4,500 per litre to Rp 6,500, and the price of Solar from Rp 4,500 per litre to Rp 5,500.
Indonesia's national oil company, Pertamina, is the exclusive retailer of subsidized fuel. Pertamina also sells non-subsidized fuel, including higher grades of petrol, brand as Pertamax. Competitors, such as Shell, which opened its first retail station in Karawaci, Tangerang, sell only non-subsidized fuel.
Table 1: Pertamina: Sales volume (million kilolitres)
| Product | 2010 | 2011 | 2012 |
| Subsidized Premium | 22.92 | 25.50 | 44.96 |
| Subsidized kerosene | 2.35 | 1.70 | 44.96 |
| Subsidized Solar | 12.95 | 14.50 | 44.96 |
| Non-subsidized fuel | 21.54 | 22.91 | 19.92 |
| Total | 59.76 | 64.60 | 64.88 |
Suppose that, before the cut, the government subsidy for Premium was Rp 3,000 per litre. Calculate the effect of the cut in subsidy on consumer welfare and government expenditure.
