Tuesday, September 29, 2009

Free market (7) - Lower fixed cost

Many small business find it difficult to survive. They have to pay high rental and credit to run their business. These high cost have to be passed to their customers in the form of higher prices.

As business premises and credit are under the control of a few people, they are able to increase the rental and interest rate on loans. They make excessive profit and cause a heavy burden on the small business and the consumers.

These high costs can be controlled by the government through legislative measures, e.g. to set caps on rental rates or the cost of capital, or to provide alternative sources of supply through the public sector.

Many years ago, HDB provide shops at affordable prices. It allows the shop keepers to offer their goods and services at lower prices and make a reasonable profit. If they overcharge and make a larger profit, another business will be set up to provide an alternative at a lower price.

This is competition at its best, in bringing the prices down to a reasonable level, based on the cost of doing business plus a fair margin of profit.

In America, the anti-trust law is designed to ensure that there is fair competition and that any business is not allowed to grow so large that they can dominate the market and have unfair pricing power.

We also need controls to ensure that property owners and bankers do not take an excessive share of the value chain, at the expense of the customers, workers and the small business owners. It is desirable for these business costs to be controlled, to promote a healthy competitive market.

Tan Kin Lian


Anonymous said...

ya i agree, i had been trying to rent a hawker stall through the bidding system at NEA for 6 months but no results. like the recent renovated buffalo rd hawker centre, the minimum bids for there are $765 but peoples can bid until $3450. Wonder what have the world turn into.

Tan Kin Lian said...

Unfortunately, by using the bidding system, the government sets a bad example like a greedy property landlord. They just want to increase their income, but it will be at the expense of jacking up the cost of living.

If the government provides more stalls, it will reduce the rental and increase the supply of stalls. This will allow more people to make a living as stall holders.

I hope that the government gets away from the mindset of a landlord maximising the yield on the asset. Instead, it should increase the supply to bring down the cost.

Anonymous said...

'The Government sets a bad example like a greedy property landlord'

Exactly. It is in fact the Government that is pushing up fixed cost for businesses and such high cost are eventually passed on to the consumers. NTUC fairprice is no more cheap as they profess to be.

The Government controls 90% of the land in Singapore and is at liberty to withhold land sales when bids are low, so rentals will go up. So, with increase rentals what does the Government do? Allow business to hire more foreign workers to cut cost, thereby pushing down wages of locals. They tell you businesses are saving cost by hiring foreign workers, but they do not tell you that the cost savings amounts to nought when it gets eaten up through the increase in rentals, electricity etc.

Each time they renovate a hawker centre, the hawkers increase prices because of the rental increase.

The Government will never increase the building of HDB flats or hawker stalls as that will bring down prices and rentals. Not when it is sitting pretty on a goldmine.

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