Sugar Producers' Revenue and Policies to Address Rising Sugar Prices

Answer

Part (a) — Impact on sugar producers’ revenue [10]

Producers’ total revenue is price times quantity, and price is set by demand and supply. Two events act on the sugar market.

Demand rises with income. Rising Indonesian incomes raise households’ ability to consume food, and since sugar is an input into food its demand is derived; demand for sugar rises. The demand curve shifts right, raising both equilibrium price and quantity, so total revenue unambiguously rises.

Supply falls with rising inefficiency. Rising inefficiency raises the unit cost of production, lowering the supply of sugar. The supply curve shifts left, raising price but lowering quantity. The effect on revenue now depends on price elasticity of demand: because sugar is a near-necessity with $PED < 1$, the rise in price outweighs the less-than-proportionate fall in quantity, so total revenue still rises.

Combined effect. The rightward demand shift and the leftward supply shift both raise price, and with inelastic demand the supply-side price rise also raises revenue. The two reinforce each other, so sugar producers’ total revenue rises (the effect on quantity is ambiguous, depending on the relative size of the shifts).

Part (b) — Policies to address rising sugar prices [15]

Because sugar is a dietary necessity, rising prices hurt households (especially the poor) and the F&B industry, so the government may act to lower price by raising supply or capping price. The policy choice involves trade-offs.

Price ceiling. A maximum price set below the equilibrium directly lowers the price households pay, improving equity of access to a staple.

Its weaknesses: it creates a shortage (Q₁Q₂), which can spawn a black market where some sell above the cap, defeating the equity aim; and rationing the limited supply (queues, seller favouritism) wastes time and misallocates the good to those who do not value it most. It treats the symptom, not the cause.

Subsidy for R&D / production. Subsidising producers to invest in more efficient methods raises productivity and hence supply, lowering price — attacking a root cause (inefficiency). Because demand is inelastic, a given rise in supply lowers price by more, so the policy is effective; it also offers a durable, long-run solution. Its limits: it depends on the government’s budget — a constrained government can fund only a small subsidy and a small supply increase — and the productivity gains take time to materialise.

Currency appreciation (for an importer). A country reliant on imported sugar could appreciate its currency, lowering the domestic-currency price of imported sugar and improving affordability. But appreciation, if the Marshall–Lerner condition holds, lowers net exports and aggregate demand, costing growth and material standard of living — a steep price for an open economy heavily reliant on external demand.

Judgement. No single policy dominates; the ranking depends on the time horizon and the root cause. The subsidy for R&D into efficient production is the best long-run policy because it addresses the underlying inefficiency and works directly within the sugar market, though its effects are delayed and budget-dependent. The price ceiling is a useful short-run measure to bring prices down quickly and protect the poor, accepting the shortage and black-market risks as temporary costs. Currency appreciation is appropriate only for an import-reliant economy and is unattractive where export-led growth matters. The defensible recommendation is therefore a sequenced combination: a price ceiling for immediate relief, paired with R&D subsidies that raise supply and lower prices durably as their effects accrue.