Externality

The main reasons for government to intervene the market is to correct for market failure, to achieve a more equitable income and wealth distribution and to improve the performance of the economy.

Malaysia government is promoting the Goods and Services Tax (GST) will to replace the service tax and sales tax (SST) and will implement it between 18 and 24 months. The reasons of the government want to replace it the GST can overcome the weakness of the current tax system which is the cascading tax, double tax and pyramiding tax, tax erosion and leakages through transfer pricing and other ways (Royal Malaysian Customs Department, 2013). GST is a more transparent and business friendly tax system to increase tax compliance and easier to record and audit. Besides, implementation of GST may enhance the effectiveness and transparency of tax administration and management. The implementation of GST will not affect the people who income below RM 3,000 per month and is expected no price of essential foodstuff will increase (Royal Malaysian Customs Department, 2013).

The price of goods and services which currently includes the SST will be reduced due to the proposed GST rate is 4% which is lower than the current tax rate (Royal Malaysian Customs Department, 2013). Starbucks is categories as restaurants and hotels can enjoy the reduction in price with 1.20% (Table 2). This will encourage the goods and services sector to produce more to boost the economy due to the lower cost.  

Graph 7: The Positive Externality (2010)