Question 3: TYS 2005 Q4

(a) Explain why pollution and congestion caused by cars are likely to cause market failure. [10]

(b) Discuss whether the Singapore government currently adopts appropriate policies to overcome this market failure.

[15]

Market Analysis - MF1.Use of Demand and

Supply 2.Supply => Cost Curves

(Producers)3.But in Driving -

Consumers' as producers5.ERP - Road Usage, tax on

producers? consumers?

5.PMC – drivers and not producer perspective

6.X-axis - distance travelled, nos of km travelled, nos of hours travelled, nos of cars owned

7.Note : Analysis from Cost Benefit perspective instead of market analysis (DD & SS)

Examiner's report TYS: N2005 Q4• A common response, and one that could have been improved, was

to set the diagrams within the context of the production of cars rather than the use of cars.

• An improvement would have been achieved if the horizontal axis on the diagram had taken account of this distinction i.e. through use of quantity of miles driven or the number of cars owned rather than number of cars produced.

• Pollution was thus presented as the result of the manufacture of cars rather than the use of cars, although all policies later presented in the Singapore case referred to pollution (and congestion) caused by the use of cars.

Diagram

(a) Explain why pollution and congestion caused by cars are likely to cause market failure. [10]

INTRODUCTION – Use KIA• Key word: Market Failure.• Issue: Identify driving will result in negative externality – pollution and

congestion.• Approach: This essay aims to….

BODY – Use SEED• Define negative externality.• Define and give examples of PMC, PMB and EMC of driving.• Explain how market fails and leads to over-usage of road/driving with the

help of a diagram.

CONCLUSION

Question 3: TYS 2005 Q4

(a) Explain why pollution and congestion caused by cars are likely to cause market failure. [10]

(b) Discuss whether the Singapore government currently adopts appropriate policies to overcome this market failure.

[15]

Task 1(Worksheet)

various policies undertaken by the Spore Govt1.ARF2.VQS/ COE3.ERP4.Public Tspt

Introduction • Currently the government has adopted various policies to

reduce congestion and pollution by reducing car usage, ownership and provision of an efficient public transport system.

• The ultimate goal of implementing these policies is to effectively reduce the number of car trips taken at any point of time, to the socially optimal level.

Body 1 (ERP)Main Solution 1 (Electronic Road Pricing - ERP):1.For Singapore, the road congestion tax imposed is known as the Electronic Road Pricing (ERP) where gantries are placed on roads to deduct fees on motorists using the highways leading to the Central Business District. 2.If ERP Price= EMC. 3.ERP rates are adjusted to take into account different road traffic conditions at different spots and at different times of the day. 4.Rates are highest during peak periods on busy roads where road congestion is most likely to occur.

5.The system allows different areas to have different rates depending on the level and time of congestion. Hence the method is more equitable because it deters those who do not need to enter the CBD during the hike of the peak period from entering. Hence, those who enter during the hike of the peak will pay the highest ERP charges as they will be the ones who are both willing and able to pay those charges. In this way, this method spreads out the volume of traffic across different hours of the day thus avoiding heavy concentration of traffic at peak or rush hours.

Diagram• The government might impose an tax

on drivers corresponding to the external marginal cost i.e. Tax=EMC at QS (distance BD) on each unit of output. This shifts the PMC upwards so that the new PMC, which equals PMC + tax, coincides with the SMC at QS.

• Hence, the new market equilibrium quantity where PMB = PMC + tax, now coincides with the socially efficient quantity QS, where SMB = SMC.

• Referring to Figure, the government make car users to pay a fee (a congestion tax on each unit of output), the amount of the tax corresponding to the external marginal cost (i.e. third-party costs) of CD at QSE. This shifts the PMC upwards so that the new private marginal cost, PMC1 now coincides with SMC since PMC1 = PMC + tax.

• The imposition of the tax equals to the EMC resulting in a no. of car journeys that corresponds to the socially efficient level of output, QSE where SMB=SMC. The tax is seen as payment for the congestion or third-party costs designed to get drivers to "internalize the externality" by considering the external costs of driving and serves as incentives to reduce the usage of cars.

Limitations (ERP)LACK OF INFORMATION:

•Is it easy to obtain information of the actual cost of reducing congestion along Orchard during peak hours to work out the ERP rate? •The government may not possess all the information needed to be able to estimate the ‘correct’ amount of tax to impose. •An overvalued ERP may reduce the optimal use of the road, while an undervalued ERP may not reduce traffic congestion by much.

LOOPHOLES:

•ERP on some roads may simply have the effect of diverting traffic, and hence congestion, to roads where there are no ERPs.

Body 2 (COE)• Main Solution 2 (Certificate of Entitlement - COE):• In theory, this is a quota system to restrict car ownership used

in Singapore. Officially called the VQS (vehicle quota system), it requires a car buyer to purchase a Certificate of Entitlement (COE) for the purchase of new vehicles. The supply of COE is strictly regulated/rationed by the government while the price of COE is subject to bidding, hence it is determined by market forces.

• Thus, to effectively control car ownership, the government will be reducing the number of COE for bidding over time so as to increase the price of COEs in order to deter car ownership.

•

Limitations (COE)• LACK OF INFORMATION:

Government may estimate the number of COEs wrongly. There were times that the price dropped to $1 when many cars were scrapped and the number of COEs in the open market increased tremendously. • BLUNT INSTRUMENT : it

affects those who are not within the targeted group

• NEGATIVE IMPLICATION: However, reducing COEs may have unintended consequences as it might leads to more intensive use of cars on the road

• Furthermore, the high prices of COE can be a cause of rising living cost in Singapore since expenditure on transport is a main component in the Consumer Price Index.

Body 3 (Pollution)Regulation/ Legislation •Mandatory installation of catalytic converter in cars; car scrapping and annual inspection: ensuring car exhaust emission from all vehicles in use meet the limits set by Ministry of Environment; banning of leaded petrol to reduce sulphur content diesel fuel; introducing tax incentives to narrow the price gap between electric/hybrid vehicles and conventional ones.

Limitations•Compliance

•Admin Cost

Body 4 (Longer Term Solution)

LimitationSolution 3 (provide good substitutes to driving)•The use of substitutes such as public transport is widely encouraged to divert the private motorist away from using their cars. In Singapore, the affordable, extensive and efficient transport network such as existing and new MRT lines and buses would encourage some private motorists to give up driving cars.

• Limitation: Public transport is not so effective for many Singaporeans who are getting richer and more status-conscious. Cars are positional goods which people aspire to possess once they become successful. Thus, no matter how efficient public transport maybe, it cannot completely replaced/substitute for car ownership. This is an issue the government needs to carefully manage in an affluent country like Singapore.

EvaluationComparing ERP and COE):

•Reducing car ownership vs Reducing Car Usage

•Both not really long term solutions- VS Better Public Transport.

Overcoming limitations of public tspt

•Bus Lanes•Increasing frequency and no of buses/ bus•routes

Conclusion• At present, the issue of traffic congestion is adequately managed by a combination of

restrictions on car ownership and usage, matched with an efficient public transportation while pollution is kept under control by various regulations.

• However, in the long run, with Singapore’s population increasing and not matched by an increase in land space, it would be almost impossible to increase the number of private vehicles. Thus the only viable solution in the future would be to get most of Singapore households to rely on public transport. Towards this end the government has already stepped up construction of MRT lines to link up various parts of the island so to provide a comprehensive rail network to offer a good alternative to private car ownership.