According to The
Jakarta Post news about local airlines demand increase scheduled airfare
ceiling there explained that the Indonesian National Air Carriers
Association (INACA) has asked the government to increase the ceiling price of
airfares for scheduled flights immediately to help its members cope with
increasing fuel prices and inflation.
Indonesia
airlines are one of the industry that governments have to pay attention to.
This was caused by Indonesia as a country with lots of island connected by the
sea. Locals and international flight both has a great amount of demand.
Indonesia has also lots of residents. Some commuters look at airlines as one of
necessity. Some of businessman needs airlines to meet clients.
The graph above is an illustration
of the article “Local airlines demand increase in scheduled airfare ceiling
Local airlines demand increase in scheduled airfare ceiling” posted by
thejakartapost.com on September 21st ,2012. The vertical black line
represents the price while the horizontal represents quantity. The D line is
demand line. This is the line which represents the amount of goods costumer are
willing to buy at any particular price. The D line is drawn based on the demand
law which is when other things remaining the same, the higher the price of a
good, the smaller is the quantity demanded; and the lower the price of a good,
the greater is the quantity demanded. The S line is the supply line that
represent the amount seller would willing to sell in a particular price. This
is drawn based on of a good, the higher
is the quantity supplied; and the lower the price of a good, the weaker is the
quantity supplied. Equilibrium is a point which is beneficial for both seller,
and buyer because they didn’t received any lost. The price ceiling were given
so airlines companies or firm couldn’t go below the price ceiling or they will
be charge as conducting black market. Anything below the price ceiling would
consider as a shortage.
In this case a national flight
carrier, Garuda Indonesia, demand the government to change the price ceiling
because the increases of gas price. Increases of gas price could cause
increases in production cost. This price ceiling could cause market failure like
in this problems.
As
illustrated on the above graph we can see that if the government didn’t
increase price ceiling, firms could face a deadweight loss because the price of
oil and avtur (aviation fuel) increases. That means the marginal cost the
company face is smaller than the marginal benefit. Right now the company is
anywhere on the yellow area meaning that it is on lost because of the high
production cost. If they move the price somewhere in the pink area there still
be a potential loss for consumer meaning that they could get the price but they
have to search on a certain day or certain time that the airfare gives discount
or promotional price. That means consumer will get higher opportunity cost. The
area the seller must reach is the peach area which is the area where seller
could get a surplus.
So
what does the government need to do? What the government has to do is to change
the price ceiling. There is some info from the article that says that the ceiling price that pertains today is based on
calculations from three years ago.
That means the government hadn’t paid many
attentions to the airlines fare. If the government doesn’t fix this they will
conduct a black market to maintain their income. For some small companies they
would decreases their production.
Based on another article I read in the same source titled “Three airlines warned over fare
violations” posted on August 29th, 2012, there said that there are
three airlines who performed a black market by setting the price above the
price ceiling. The airlines are trying to get surplus since the date of the
black market performed is near the Hari Raya celebration which means the demand
in airlines are big. Consumer’s response to the price would be very responsive
(inelastic). About this government needs to find a solution. Consumer will have
to pay more that means it is the consumer loss.
Governments
have to take quick actions to resolve the problem. If this market failure
continues, the airline would not performed any service, some would performed
black market and some would meet loss.
Is
there another way to resolve this? Another way to solve the problems is by
giving oil subsidy. If oil the price goes up, production cost goes up. Then
airlines would increase their price. If the price of airlines tickets goes up
middle to low income people would be affected. If the government gave the oil
subsidy the airlines would lower their cost of production and maintain their
price. Of course there is a lots of substitute for airlines such as trains,
buses, cars, etc. But basically travelling by plane is comfortable and fast
that’s why a lot of people choose to ride a plane.
The conclusion is that the
government needs to take quick action. They have to be responsive to problems
and fix them. To resolve the problem that the airlines is facing, government
has to calculated a new price ceiling that would benefit both consumer and
seller which is somewhere in the equilibrium. There is another way to resolve
this is by giving an oil subsidy so that company could lower their production
cost and maintain their price. Government needs to pay attention to both
producer and consumer. Government needs to find the best solution to benefit
both consumer and producer by controlling the price near the equilibrium.
My advice is that the governments would do
much better in solving problems because there are lots of problems in
Indonesia. Governments need to focus on the basic economics which is what, how
and for whom. What do the producer produce? For whom they are producing and how
do they produce it. Governments have to think how to help them resolve the problem
they face in doing the basic economics.
Tiffani Yulita
0311332
Tiffani Yulita
0311332
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