| Summary: | This paper examines the effect of subsidy policies for the petroleum
sectoron the overall economy in Indonesia by using a computable general
equilibrium (CGE) model. The latest Indonesia input output table of year 2008
with 66 different production sectors is used within a generalized framework.
There are some striking results upon the implementation ofa CGE model in this
study. An increase in a subsidy for the petroleum sector is the best policy
instrument among all. A welfare gain is measured to be approximately
Rp265,040,590.80 millions when the subsidy rate of petroleum sector is increased
by 10% and the cost of policy changes in the budget constraint of the government
is not considered explicitly. When a 10 % subsidy decrease is simulated, there is a
welfare loss as much as Rp 205,215,835 millions. However, if the reduction of the
petroleum subsidy rate is followed by the change in a production tax, than it
becomesworst. The welfare loss by implementation of this policy to petroleum
sector itself is measured to be approximately Rp 654,938,084.23 millions. The
result of this study suggests a more explainable argument to encounter such
debates on the petroleum subsidy policy. An increasing subsidy policy, in the
short run has proven to be better implemented vis a vis the decreasing subsidy
policy. Furthermore, the implementation of an increasing subsidy policy should be
followed by another scheme which can accommodate the welfare gain on the
whole economy based on an equity point of view.
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