Fatimah Binti Kari, Muhammad Mehedi Masud, Md. Khaled Saifullah / Journal of Asian Finance, Economics and Business Vol 4 No2 (2017) 25-36 25 Print ISSN: 2288-4637 / Online ISSN 2288-4645 doi:10.13106/jafeb.2017.vol4.no2.25 Subsidy Rationalisation for General Purpose Flour: Market and Economics Implications* Fatimah Binti Kari 1 , Muhammad Mehedi Masud 2 , Md. Khaled Saifullah 3 Received: March 22, 2017. Revised: April 9, 2017. Accepted: May 2, 2017. Abstract Subsidies are an instrumental policy making tool for many governments, but their importance depends on the market situation of the national economy. Efficient subsidy implementation would allow the government to correct market failure thereby aligning social and private costs and benefit. The general objective of this study is to justify the need to rationalise subsidies for food items such as flour. This study assessed the structure and conducts of the general purpose flour market in Malaysia; and analysed the impact of subsidies on market performance to recommend policies to increase market efficiency under the subsidy rationalisation program. To accomplish these objectives, the study adopted a microeconomics market analysis as well as the standard structure and performance analysis method. These two approaches showed the characteristics of an industry’s consumer behaviour, competition, as well as the efficiency associated with government regulatory policies on the flour industry. One of the biggest influences on the domestic market is related to the food consumption behaviour of the general population. Food consumption behaviour reflects global trends. As income rises, food trends tend to be consumed in processed form or in such a way that adds value in another manner such as the preparation of food products. Keywords: Subsidies, Policy, Rationalise, Flour, Malaysia. JEL Classification Code: H20, H24, H70. 1. Introduction 1 Subsidies are a decision making tool for many governments, but their significance relies on the market situation of the national economy. Effective implementation of the subsidies would allow the government to correct market failures, which would align the costs as well as social and private benefits. Thus, government intervention in the * This work was supported by the University of Malaya under the Employment Structure in Future Cities grant [GC003E-15SUS]. 1 First Author. Department of Economics, Faculty of Economics and Administration, University of Malaya, Malaysia. E-mail: fatimah_kari@um.edu.my 2 Corresponding Author. Department of Development Studies, Faculty of Economics and Administration, University of Malaya, Malaysia. [Postal Address: 50603 Kuala Lumpur, Wilayah Persekutuan Kuala Lumpur, Malaysia] E-mail: mehedi@um.edu.my 3 Department of Economics, Faculty of Economics and Administration, University of Malaya, Malaysia. E-mail: ronykhaled@gmail.com market is required because typical price mechanisms have a number of failures that cannot bring social benefits to all parts of the national economy. Based on this argument, the Malaysian government pays a high level of subsidies on energy and some selected essential food items such as sugar, rice, cooking oil, and flour. A subsidy that ultimately decreases the prices of goods for the end user would normally increase the demand and the overall usage of the goods. One form of government intervention is the payment of subsidies in order to increase the welfare level of poor people. Malaysia, like other countries, pays a high level of subsidies on food, energy, education, and other social sectors of the economy in order to improve poor households’ access to various commodities, primarily food and energy. This is also to reduce their poverty level. In 2013, government expenditure on subsidies equated to nearly 16 per cent of its operating expenditure, which is about 5.1 per cent of the total gross domestic product (GDP) (EPU, 2015). Although this can bring social benefits through access to affordable energy and employment in the economy, it may also carry economic and environmental costs. In addition,