Malaysia's Egg-Export Restriction — Shortage and Price Rise, and Strategies for Bakeries and the Government

Answer

Part (a)

Two effects act together. Because Malaysia supplies 73% of Singapore’s eggs, the restriction sharply lowers supply. Simultaneously, on the announcement, households and bakeries anticipating future price rises raise their current demand. At the original price, quantity demanded now exceeds quantity supplied — a shortage.

Market for eggs. Supply falls S₀→S₁ (export restriction) while demand rises D₀→D₁ (expectations). At P₀ a shortage Q₂−Q₁ emerges; the price rises sharply to P₂, reinforced by both shifts, while quantity changes little because demand and supply are price-inelastic.

The price rise is sharp because of the elasticities. Demand is price-inelastic: eggs are a necessity in homes and bakeries with few substitutes, so the supply fall raises price more than proportionately and cuts quantity less than proportionately. Supply is also price-inelastic: eggs cannot be stored long and hens take time to raise output, so the demand rise raises price more than proportionately too. The shortage drives price up from $P_0$ to $P_2$ — a movement along the curves restoring equilibrium at a much higher price and only slightly lower quantity. Both shifts therefore reinforce a sharp rise in the price of eggs.

Part (b)

The government’s concern is efficiency and equity (eggs are widely used), while bakeries seek to protect profit. The thesis is that import diversification is the best government strategy and cost pass-through with longer-run R&D the best bakery strategy, because the price-control alternatives carry serious unintended consequences.

Government Strategy 1 — subsidy. A per-unit subsidy shifts supply right, raising quantity and lowering price for consumers. But it over-allocates resources to eggs (a deadweight loss) and carries an opportunity cost — funds diverted from education or healthcare.

Government Strategy 2 — price ceiling. A maximum price below equilibrium keeps eggs cheap for those who obtain them, but with supply already cut it creates a persistent shortage and a black market where eggs sell above the ceiling — defeating the aim and harming those shut out.

Government Strategy 3 — diversify import sources. Sourcing eggs more widely (as far as Ukraine) raises supply and reduces dependence on Malaysia, lowering price and building resilience. Its limitation is higher transport cost and freshness loss, since eggs are perishable — a quality trade-off.

Bakery Strategy — cost pass-through and R&D. Eggs are an input, so dearer eggs raise bakeries’ costs. In the short run, demand for cakes is price-inelastic (few immediate substitutes), so bakeries can raise prices and increase total revenue, since quantity falls less than proportionately. In the long run, demand becomes price-elastic as consumers find substitutes or bake at home, so prices must come down; bakeries should instead pursue non-price strategies — R&D to use fewer eggs or liquid-egg substitutes — to insulate themselves, though R&D is uncertain and costly.

Judgement. For the government, import diversification is the best strategy. The price controls are inferior: a price ceiling creates a permanent shortage and black market, and a subsidy costs the budget and distorts allocation, both harming efficiency and equity. Diversification, despite higher transport cost and some freshness loss, raises supply durably and reduces strategic dependence on a single source — a positive net benefit. For bakeries, short-run cost pass-through is sensible while demand is inelastic, but it is not sustainable: in the long run it invites entry and home-baking, so the durable strategy is R&D to reduce reliance on eggs — though this is more feasible for larger, better-resourced bakeries than small ones. The decisive considerations are the persistence of the restriction (favouring structural fixes — diversification and R&D — over temporary price relief) and the time horizon (pass-through works short-run, R&D and diversification long-run).