Market Failure Essay

7/28/2019 Market Failure Essay

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Although efficientat producingsome good such as food and clothing, the free.market system failed to produce effectively things like street cleaning andeducation.a) Distinguish among private goods, public goods and merit goods and explaininto which category street cleaning and education should be classified. (12)b) In the light of the statement above, evaluatehow government intervention canhelp bring about a more efficient allocation of resoUrces. (13)GeneralPlanPart a). Distindion etweenhe hree ypesof goodsby cfraracteristics,ithexamples,andwhetterthegovemmentrovidest.. Justfr the classificationf street leaningasa public oodand education s a meritgood.Part b)r ConskJerhepossible aysofgovemmentntervention.. Evaluate hether esources reefficiently llocatedn eachwayof intervention.

Street Gbaning. Tecfrnicallykely to be a publicaood.. Non-excludable:Streets are publicareas and it is difficult o extractpayment from users.Free dJer problemexists.. Governmentnterventions required o maintainpubliccleanlinessand hygiene.. Nonriualryr: here s no extracost n supplyingsuch services o an additional consumer.. Meritgoodcharacteristics:streetcleaninggeneratesextemalbenefitson theenvironment s it improves he health of the community.. Thus he good s likely o beunder-consumedn the absence f govemmentprovision atzeroprice-Education. A clearcaseof a meritgood.. Prirrate enefitsare the higherpay and moresatisfyingob-. Externatbenelits nctude the faster economicgrowthas a resultof a more educatedpopubtion-. Tends o be under-consumednd under-provided.

Part a)Private oods Publicqoods MeritgoodsNaturecharacteristics Excludable;Rivaln consumption Non-excludable;Non-rivalinconsumotion

Theyare privategoodsdeemedo bedesirableby the stateExamples Petroland mostconsumer oods Streetighting, ationaldefence,aw& ordel Edu'cation,asichealthcare,sportsfacilitiesGovemrnentprovision Not equired.Themarketmechanismanprovitle llsuchgoodsRequired.Themarketmechanismillnotprovide llsuchgoods

Not equired.Themarketmechanismcanprovideall suchgoodsbutnot.enoughs produced-

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. Governmentnte'ention s requiredoachieve socia*y ptimumeverofesource

Jtcation' ' -^odas t is excludablendrivalrys presentnconsumption'

. lt is a Private o

:"rt:l"*mentinterventions notrequiredf the ree ":*

canproducehegoods:'ft':u*-ildd,rJtrnrg'"overnmentnr. 6ou"tnment rdefinitely elp. Publicgoodg.t.

. Evalu-alionth" amountol suostul."1^^^^*,e eJficiencYn resource llocationn thecalculate. r^^ rra re,edo atain economic ffit. f,gis"tiornarsoe sedo *Jr,i:3ffi1?'[i?:;3;1;ilfJiftl,';,":t#+U*tg,t'*""t?"r""H'gi,t"":ft?:?:?_=:*:,":'#divlevel'.iuuru.ti",Ti,ff;'e1"n:'J$,lif,$i3:i':X*$"J;;"ttained'sociallyof

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(b) 1.2.3.

(a)Explain he sourcesof market ailure' (12m)(b) Discuss he need or governmentnterventionn suchsituations.(13m)

GeneralPlan(a) 1. Definemarketfailure-2. Explainhevariousormsof market ailurc'Explainhevariousormsofgovemmentntervention'Evaluatehedesirabilityf suchmeasures'Conclusion

(a)1. Definemarketfailure.

A situationnwhich hemarketforces f DDandSSfails o producehe'righf quantityanJ charge he'righf price.Themarketoutcomes therefore eitherallocativelyefficientnorproductivelyfficienl2. Explain hevariousormsof marketailure'- - nL piouision f publicgoods characteristicf non-exclusionnd non-rivalrymake tnot-prontaOleoi privaiesectoro producehegoodor service.Unableo chargeaprice).- inaO6quaterovision f meritgoods ( marketdoesnotconsider xtemalbenefits)- ou"r proOuctionf demerit oods ( marketdoesnot consider xtemalcost)- marflt imperfectionsue otheexistence fOligopoliesndMonopolies

Explaineachof theaboveand ndicatewhyproduction oesnot akeplaceat the pointwhere SMC= SMB.lllustratewithdiagramswhere elevant'

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(b)1. Explainhevariousormsof goveqment nteryention'- Oirectprovision f publicandmeritgoods I I;- Subsidies- Taxation- Bans- regutation f monopoliesoligopolies2. Evatuatehedesirabilityf suchmeasures'Evaluateheeffectivenessf themeasures 'g'

(difficu|tiesindeterminingthetax,subsidiesorfines)- lackof information-nignadministrativecostandc|osesupervlsionneeded- ldPholes in monitoring- time actorandcostof implementinghemeasures3. ConclusionAlthough ovemmentnterventions neededheres stillaneed o assesshe costand

benefiis i govemmentnterventionefore eciding hetherhenterventions necessary

or not.

Explainhowtworks.Giveexamples ndIllustratewith diagrams

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GeneralPlanParta.ffcnn" and heshiftof emphasiso marketmechanismo allocatet resources.2. Meaningof marketailure;: 3i6i6ioemics, reRectsrarlousypesof marketailures:extemality,marketmperfec{im'and ncomenequalitY-4. Explainne,gxemai-bsts of suchepidemics. ncludean explanationf privateand socidco5{a;Marketmperfectionsnd Incomenequality5. ConclusionPartbffiefinition of optimalallocationof rcsources atlocativeandproductiveefficienciesZ. fne need orgovemmentntervention'-- Discusswithrespecto marketailures3. short temrgovemmentmeasurcs ndprobrems ssociated ith he mplementation.4. Long ermmeasuresndevaluation f thesemeasures5. Conclusion

Parta.1. china andthe shiftof emphasis o martet mechanism o ailocate t resources.china is nown.,or" p"n. ti nowailowspricemechanismo ailocatetsscarce esourcesin someareas.This s a contrasto thecommand conomy ecades gowhen hegovemments in total."ont,olofeverythinge.g.inbankirg,manrrfacturingandhea|thcare.However,nismove"meitrom hecommand conomyo freemarkets in stageswhichmeansgou"*.n"nlr,", notn rry'"t go of at contrors.As a resun

herestit existsa lot ofbureaucrary ndred aPe'

2. Meaningof marketfailureA situationnwnicn-an nrestrained arketeconomyeads o too ewor too manyresources oing o a specific conomic ctivity.Marketailurespreventhe pricesystemfromattainingeconomicefiiciencyaswe||asothersocia|goa|s.Resources renotallocated p o thepointwhereSMC= SMC

3, .These silentepidemicseflecthevarious ources f marketairures uchas existenceof External*ti, t"ti"t i*p"tr".tions, mperfectnformationnd nequality

Rightno* 5 miltionpeople n china have uberculosis,10o/ol peoplehavechrorichepatitisB. Due o lick of resourcesandattention, uchsilentepidemicsare simnlvignored.'-?:,"j:*:1::-::,:'::"^:l:1[?1t3"?::'Ei ilffir'"lilii ""n thegovernmelt fGh-inansure noptimal llocationf scarresourcesn ne rovistn of health ervices?

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4. ffiernality, market mpertectionsand income nequalityo ExtemalcostsfsuchePidemics'Privatecosts ncludehe medical ost,costof discomfort, ostof deathExternal osts nCuoehe cost ncunedby herest9f thecommunityngettingtuberculosis nJ n"p B, thecostof griefwhen hey ose heir ovedoneswho catchsuchillnesses,hecostof burial.Socialcost private ost+ extemalcost- An altemative pproachsto o


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wrr.orn on of optimararocationf resources atocativeand productiue fncbracs

2.|n(a),wehaveseenthedifferentfgp"ofmarketfai|ure.ThismeansthattEfetsinefcient.,,oooo?!i'1"il1"'''"oif:"y*::::iylffJL?lKffi ffiil"#;i"J;H#?J'#;-;;;' iitiit"n"rfon. Discussithespeciar5*a failure 'g' extemalitY'r'strortffi Sfi:trffij?:jfi'r"?sovemmentcansive.outmoresubsid'es-(rvtbenentexist),totlegt'."1',9.'PJ'{Yl**:*:t*lm;f'#'.ffi:i*:?fll'J""1i"ff:ttii;;i:!,i!m;6"*illrll""tsuchdiseasesabdemandorhearth;ff;"r *'r incre-as!.-'ss wit increaseotheso&ty olfrlevelofoutput' ..-L6 rarirr r doctorsaising e PJi:EsHoweverowmuchsenough?Will his ead ounethicalsinceheyknown"iit" p"il"nt: hale inancialhelp?WillgovemmentnJllt"io tonnancehesubsidies?

- Tomakehemarketessmperfect,.govemmentanlorg thehospitalsobenm

transparentntneirp"ttiJt5' e'g' not'p-iialt{:lg be-transparentboutre cddmedicine,n"oo"toi[ii':iii;;;i-"f ttJ*:" rnf gne donehroushesistfi'However,hesed#; tont'ott ar" "xp"nsiveto monitor ndenforce'''"i::;HlffiffiJTfrm":::g:"j,ff""jlff i'X13lj.;:ffi,fff;""1#fff"X[t":?5#:H;iffi;;s;1nat 1 sasociaresponsibiritvostavhealthy. This is " u"rv long procest.

-rn-"iJition, the funds to finance such progralrmay be costly. ^^-i^'o rnr rha tano erm measures o take effects.These epidemicsmay be too serious or the long term mt

: R #":H$"1?;"ove.va ccinel_tgton =e disease^qrompreadns- Produce ut.in"" *hi"h "t" cheapenoughor everyone'Theprob|emwil|a|sobetheamountoffundsneededandtimetaken.

5, Conclusion ^L ^L^?r ram anr{ lnno term measures to solve theseGovernment as to adoptbothshort erm and longterm tepidemicso improvJt#;ffiic welfareof thepeopten China'


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ft. Singapore overnmentn recentyearschannelingan increaseamountof resCtowardJ education as well as research and development in its effort to crrrtknowledge-basedeconomy.a. Distinguish between a private good, a merit good and d'public good andunderwhich of these classifications the following should be placed:(i) education(iil researchand develoPment Il4b. biscuss whether,according to economicanalysis,govemment interventiolead to a more efficient use of resources [lGeneralPlan:a) ldenffi the differencesbetweenprivate,meritand publicgood.

Development1. Pivate GoodRivalrous *cludableLeft to privateProducers2. Meit GoodRivatrous ExcludableA privategoodthatgeneratespositiveextemalities.Output (Qe) s less than sociallyoptimum Qs)Diagram:SMB>SMC

Price Diagram: Allocationof resourceswhen extemalbenefits arepresent

Qs outputi. Education

' Excludable thosewho do not pay fees/meet he grades. Generatepositiveextemalities. Secondary/primaryltertiaryducation. Highereducation privategoodfeaturesmoreprevalenti i . R&D

' Non-rivalry Knowledgetom R & D doesnot reduce he amount of knowledge hat canbe usedbYanother irm.' Excludable possibilityof chargingwith patent ights ssued' Generatepositiveextematitiesustifyinggovemmentsubsidization f R & D spending. A meritgoodas privatesectorhas ittle ncentiveo developnew technologyon the s*desiredby the govemmento givethe countrya competitive dge.

Qe

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3.PublicGoodNon-rivalry- i.iln**"roo"ut" ---r..^^ *hannarrfrce riNo private roducerswilling produce hegood freeriderproblem

b)GeneralPlan:- -- i"tt"A"Ai"n: Explain fficiencyMarketFailures

resour@sCondusionH|fftfi$:g! pareroptimarity-rigt rbehavior;MC PMBsMc&sMBAna$ocationwherebyt ''l'ii-#t"io':,: llF anyone etteroffwithoutmaking,#;;;;;;;ff'l:"'thatsocialefficiencvismaximized'MarketFailure:hperfedioninthemarketsystemnecessitatesgovemmentintervention'Astateinwhichthemarkeidtes not e resouroesficienfly'fuf"*"t Failures sdiscussed:' Absence fPublicGoods-, fr*"fifes beinggnored. a_ ^^ *..^h aamnorir.. wasbg*;;;;-pl''Au*.0u" 1" too much ompetition

' Rise"f m";;;tieaoing to explcftationofconsumers

' lncomenequalitY' Pricensatrility ndunemployment

:""#*Sffi:hgn rerep o;rtncative,istributive,tabilizationndesulatoryolesoimprovethe;i"";il; r"** determinedllocationfresources'Distributirret;;;;"is attempto ;i*tr incomeransfers y axinghigher-incomeindividuatsprogressivencorne;;-;;king gmnts o lowei ncomendividualsn theio# ott*rrire"paymentsl. .--*^- ^{ aama arw'lq an, servi@s (demeRegulatory:elp lohibitth:-P11|u"Uonfsome q!" and ervicesdemeritoods) ndpromote-*ilption otmgrtt-S.oO!;i,;A*tioi' Regulateorkinglo-'-'' controlmportsandsetapJ#'f#;;ri "f -1",^;;duciveforproperonductfactivities'Allocative:"ffi;;;;'*riti"" uv

"*"q9nol reoulationndencourageositiveextemalitiesfiil;d,'rrt., "n6*g-,il"tins trestructurefmarketsoobtain

morecompeririveiiffif,inro" priiildit ""d merit oods heremarketailsandg:;:n'f,tru*if ado{leoppriateonetayndtscarolicies'Mayatso"d;;i;."ti:*lPa.r *licies to.achievextemal tabilitv fan

economyGovemment ayalsoaoopt uppffi" poriti"t o alter he evelof aggregateupply'

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probrems f nterventionndhowgovemment easures ayworsenheailocationf resources:oaa

ObjectivesfGovemmentmaybeconflictingResultnfteeriderProblembnort"g"r andsurpluses rise rom he nabili.tyoforgcast ccuratelyhe;;;; of he uture.mperfectnowledgeesultsn ov.erestimationr"nlo"rtiration of ftrturedemandwhichmay ead o misallocationf resourcesine puuric ector,n providing oodiandservices;s competingorscar@i".""r*r available. ven f costandbenefit nalysiss undertaken,here sdifficulty fvaluingall costsandbenefits'Absence fprofitmotivemay ead owasteof resources'

GonclusionExtentofstate nterventionependson thepeculiar haracteristicsf the ndustriesconcemeoand he patemalistic ttitudeadopted ypolicymakers.Govemmentailuremayoccurandefficiencyofesource llocation aybeat the expenseofothergoals.

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n differ and- isc$ss he extent owhich it is possibt;;;JJesirable t" tn-"["-privateand socialbenefits""ffi0"'

GeneralPlanExp|aintheconceptofpositive.gxtea{itiesandextema|benefitsandhowtheproductionofa qoodwhichgiu"r'ri-;Jio positive."f;;t'"s-resurts in misatocation f resources.Explain

th6 measureshat;;;;Loopreo t" ,J;;;-th" gap Uetween rirmteand sociarbenefits'b'Jrn'ii"'ii." tte desiiability ndsu@essof the measures'Suqqested nswerlntroduction. Definition f privatebenefit benefits hat accrue o the indMduarwho is consuminghe: [ffi,;"; of sociarbenefit benefits hat accrues o society rom the consumption f a

oood', Frivate and social benefitsdiffer when there are extemal benefitsarise from the;;;ftion ot a Particularood *DeveloPment. Definition f extemalbenefits'Extemalbenefits rebenefitsn"t "t""'UolrrlUy nitOP91|!*twho

are neitherthe producet *ii" *niumerbf the good'Theygiverise o extemall"""ntt' Asa result'socialbenefit>Private enefit'(lllustratenoexplain ith.diag^ramSMB> PMB)E.J."t" health ndeducationervtcesDefinition f meritgoods Goods ikeeducation ndhealthservices ive rise o |argeextemarbenefits"no-#'*iled mentgoods.These

aregoodswithpositiveexterna'tiesthataredeemed uiitlurt ioi Ln""ption bythe political rocess'where private ndsocialbenefits iffer, herewillbe under-allocationf resourcesand

pilg+ EMgi s 9r4g

g}|g3 ?Mb+Er4gory

o$ t

unO"t*intumPtionof thegood'Where hereareextemalbeneftts'he ree marketwillfailto allocateesources fficiently.s thefreemarketwillnot uf" intoaccorrnthe benefitsiiJ li"'li"i"vedbv hird arties'reemarketequilibriumccurshtt"'PMB

=PMC nd his;il;;iii; under-ailocationfresourcesndffirJrl-;;tio to"i"tv' (rxptainwith heaidofdiagram)

that levelof outPut'ffir':;;;;; "nil= PPsgiven

o.consumersilllncreasedemano' 'tuanlitywill ncrease o thesociallY Ptimalevel'

Measurestoreducesapbetwe-en,.p.:Y::"3T::::'3fiJ"J:1$i;::ffiJlf"ffiffi#ffi:iliii{}f^111'"ffilffii:""S:"Ji:[:ffi;lJ;,lssJff;.t"'Hff J:^:J1ffiff#;i'tii"-"Ln'"umernuvs"n*d,::;I'cewhigi""t*t" toPositiveIi"j,i3l'l3l:ffiilffi i;;; " su!s1!YP9''itYl"l:f iJv(trrrrrre ' t ' i t ' - -- rcgs at;;*tltequallo theEME hat nexpeners


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Governmentubsidisesducationn governmentchoorso ensurehesocially ptimaloutputs Produced'Evaluation , !_^^n^ ^r aacr r. i andadministrativeosts.rncurscoston societyn termsof costof hiringcivilservantsDifficulto determin"'tn""""4 valueof extemalbenefiLEncourages "opt"io ;;;;t" moreof sociallydesirable gods',/ Government inancingald production- lf the po'iW" extemalities re large' h-"-'govemmentd;;;i" fi*it"..tnJ "OJitionatpiodudion acilities o thattherewill

bethe right"toun{oi",il J""i pt o'*d' With

referenceo the diagram'he govemmentmayneed,opJ]i""ir[-rnortr"[ b;td;oQi and'Qf in order o achieve

hesociallvootimalevelof output.GonemmentoutJn'nOandoperate entresor inoculationagainstcontagiousiseases'

Evaluation !- ^---^ ^f aacr s andadministrativeosts'lncurscostonsocietyntermsof costof hiringcivilservanttLegis|ation-Theqo*ml:nlmayrequire.b.y.l"'"lllt"certainactionbeundertakenbyindividualsn thesodety.E.g.scnir-"'g" childrenare equiredby aw o be inoculatedPrior o schoolentrance'

F::H*: requireontermsofofficersandadministrativesrs in ensuringhe raw sfollowed' 'num quantity f socially esirable oods'Forces@nsumerso consume mlnlr/ MoralSuasion publiccampaignso promoteheconsumptionf the

goodEvaluation:GostlYo run hecamPagnAs stricfly oluntary,may-not ielddesired esults'Conclusion. Comment nthedesirabilityndsuccess f the measures/ where theextemal enefits"r" "r"rr, in" mst of intervention aybe

greater han hebenefitderiveJromconsuring h"li.i"rrv Lptir"r rever.t s therefore etter or thegovemment ot o intervene

/|nmanycasesthevalueofextema|benefit isdff icu|ttomeasureparticular|ywheretimesaving, ifesavingmaybeinvoruJ rn"""urateestimationf the negative xtemalitiesmayresu|tingovemmentfai|ure-f"i|,'"ofthegovemmenttoallocateresourcesefficientlY'

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a)b) bistinguish betweenprivate and social cost- (8)..Social optimality in the allocation of resources can only be achieved withcrovernment ntervention." Discuss. (17)

Plana) Explainpte andsocialcostswithexamples'Distinguishhemb) Explain ocialoptimalisn resource-atlocation' Explainhowsocialoptimalitys achievedwithgovemment'interventionls theregovemmentailure?Suqqestednswerffie cost= cost ncunedbythe byvelor sellerof thegoodne costof producer costof production omeby producers, .g. rawmaterialcosts, rent,wagepticost of consumptlqn prsonal ostof consuming goodSocialcost s thetotral osttosociety. t comprises f pteandextemalcosts.Extemalcost is the cost o a thirdparty(i.e. not the buyeror sellerof the good).The thirdparty s notcompensatedor the cost.E.g.'n firm thai pollutes he environmentmposes cost to residentsivingaround thei"Etor'. The healtir tandard f the residents oulddeterioratendasthmapatientswill needto visit heirdoctorsmoreoften-Differences- pte cost s partof socialcost-With the existence f extemalcost,socialcost > ptecost.However,f extemalcostdoesnotexist,socialcost= ptecoSt.- pte cost is accountedor by the free market orces.External ost, a part of social

cost,will notbeaccounted yfreemarketorces'b) Socially ptimum llocation f resources ccurswhen[aargihalSocialBenefit= MarginalSocialCost- no under-or over-allocationf resourceso theproduction f thegoodrightquantity f ouput producedor societycommunitYelfares maximizedWhereno extemalitiesxist,a perfectly ompetitivemarketachieves quilibriumwhere MR= MCandP=MC.Sociatly ptimumesource llocations attiained.with extemalities, erfecily competitivemarketswill either under-or over-produce heoutput.tt-extemalcost exists, herewill be over-productiony the free market.Explainwith adiagram.iirir"in the conectivemeasures hat can be undertaken y the government o achieveefficientesource llocation evaluation'if extemalbenefrt xists, herewill be under-productiony the freemarket. Explainwith aOirgr;. gxplainhecorrective easureshatcanbeundertakeny hegovt'+ evaluationEvaluation:ovt ailure esultswhen hecostof govt nterventionxceedshe benefits.Wn"i" the extemalitys minor,here s no need orgovt nterventioni'n" g"; ooesnothlve perfect nowledgeo decide n heexactamount f tax imposedorsubsidyo Provide-t"r1','puulic goods non-excludabilitynon-rivarlyn consumption)ill not be providedatallby reemkt,Govtnterventions required'

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(a) How do merit and demerit goods differ from public goods? (10)(b)Discuss he view hat the economicactivityof the government houldbe restrictedto the provisionof public goods. (15)Approach:Forpart(a),students reexpectedo explain he differences etweenhegoods n 2 aspects;characteristics degree f marketailureForpart (b),students rerequiredo explain irstly;why govemmehtnterventions neededto providepublicgoods.Also, t is necessaryo explainheothermicroandmacroobjectivesandwhy economic ctivityof thegovemments neededo achievehese.AnswerOutline:(a)Differences etweenmeriUdemeritoodsandpublicgoods:i) In termsof characteristics:Merit& demeritgoods+ rival nconsumption excludablegiveexamples);::butmeritgoodsare sociallydesirable ithpositive xtemalities hiledemerit

goodsaresocially ndesirable ithnegative xtemalitiesPublic oods:+non+ivaln consumption non-excludablegiveexamples)ii ) ln termsof degreeof marketailure:Merit& demeritgoods+ private ectorcanprovide uchgoods.However,heoutputs not at socially ptimumevel.Meritgoodsare underproducedhiledemerit oodsareoverproduced.ence here sa need orgovemmentintervention.Public oods+ private ectorwillnot rovidef left omarketmechanism,govemment ustprovide ublic oods

Conclusion(b)Explainwhy govemmentnterventions neededo providepublicgoods. Non-excludable problern f free rider+ privateproducers nableo collectpaymentrom hesepeople. Non-rivalin onsumption MC= 0 = unprofitableo charge eroprice. Therefore,f left o marketmechanism,herewouldbe noprovision f publicgoods.. Howeverhesegoodsareessential eMces o theeconomy ndprovide aluablqbenefitso society. hus t is the roleof thegovemmento provide.Explain thermicro ndmacro bjectivesndwhyeconomic ctivity f thegovernmentsneeded o achievehese. To conectother ormsof marketailureso bringabouta moreefficient llocation fresources

- externalitieshether eneficiale.9.meritgoods) r adversee.9.demeritgoods) ausemarketailureeadingo a non-optimalllocationf resourcesfromsociety's ointof view. To bringabouta moreevendistributionf income. To achieve table riceevels r ow nflationate

Conclusion

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2009 ACJC Prelim Exam Econ H2 Essav Question 3a) Explainwhy the presenceof traffic congestion is a source of market ailure. t10Ib) Evaluate he relative effectivenesso ft he curreni measuresby Singapore government o

reduce he probtemof traffic congestion t15lSUGGESTEDNSWER.Negative xternalitys one of the causeshat can lead o marketailure.We will ackle he issueofover usageof roadcausing raffic ongestionn this case, he risingnumberof vehicles n the imitedroadspace.Traffic ongestions a condition hatoccurswhen oad usage increases ith he sameroadspace,and scharacterized y slower peeds, onger rip.times, nd ncreased ueueing.Dueoimperfection f thepricemechanism,he roadusage s beyondhe socialoptimal eveland heyarecausing eadweight oss o society.Students re requiredo explain he ollowing onceptso show hat he excessive sageof roadscanlead o negative xternalities.. Private osts. Externalcosts. Socialcostslllustration: tudents re requiredo explain he diagram

MPC,MSC

(a ) Marking Scheme

P"P',,

o Q-r"Knowledge, pplication,understanding nd Analysis

L3 Clearexplanation f howexcessive oadusage eads o negative xternalitiess oneof the sourcesof market ailures.Cleardiagramwith detailedexplanationo reflecttraffic ongestion.7-10

L2 Very heoretical xplanation f negative xternalitieselatingo market ailure.Undevelopedxplanationnddiagram otclearly xplained. 5-6L1 Foran answerwhich s gpish,and does notaddresshe ssueof negative xternality 14

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hT EtchraE the relativeeffectivenesso ft he currentmeasures by Singapore governmentb reil.Ee the problemof traffic congestion.[l51

turffits n'nlst rovidea balanced iscussion nd heanswers houldconsiderhe relativeuftanmr,reressf eachpolicy.Congestion an bereduced y either ncreasingoadcapacity supply),ur tlt, .edrucinEraffic(demand).l" CrOn*ership

. The COE(certificate fentitlement) ystems a systemwhichdictateshat carbuyers-rnustpurchase COE before ctuallybeingable o buy he vehicle. he mplementationf roadtax s alsoan additional eripheral ostof a vehiclepurchase. hepurposes to reduce,lhegrowthof carownershiP. ' .7.'.Eyaluationand relativeeffectivenessr coogstions due o roadusageandnot merepossession f cars, n this regard, arownershipmeasuresre a blunt nstrument. highcar ownershipcostsmay haveperverse ffecton increasing ar usage.Onceacar s bought,t s used ery ntensively.n Singapore, veragemileages 21 000kmperyearcomparedo 9100km in London nd 13900 m n Melbourne.. Thereare monitoringnd enforcementosts. Compulsorynspection hould be done every 6 months or all vehicles.Cars hatbreakdown ftenshouldbe testedat regular asis.. Monitoringof traffic situations s perhaps he most effectiveway to reduce trafficcongestions.Regularannouncementsmust be made over radio o warn motorists f

possible lternativeoutes.Morepolicepatrols re also needed.2. RoadUsaqe. . ElectronicRoadPricing(ERP)ERPgantrieswereset up at roads eading o areaswithheavy rafficas wellas thecity areas o collect oad usagecharges uringpeakhours- he- purposes meant o reducehe numberof carsentering he cityareasand redistributing.'thesecar users o use he public ransporto access he cityareas.. Taxon petrol.Theunderlyingrinciples'internalisation'ln hisway, he MPCwill ise,moving loser oyvards SC.Students rerequired o explainhe diagram

MPC,MS C

PmMPB= MSB

Q" Q,n

P"

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Evarua??pa.:#:g=fi""':'$i:il""o on oad saseatherthanar wnership. Despite tne cr,arges, raffic congestionstill persists -^...L;^rr^ ^ranrica c ri:#"#;"";;;"""urate varuationf heexternarostwhichnpracticesdituril'.Taxat ionprovidesrevenueforthegovernmenttof inancesocialandcorrr . r ,nndeveloPment rojects''Theeffect ivenessoftaxinreducing.product ion. leve| , is 'alsoconstrainedbyelasticity t oem"i. 'ilun"r" o"manJ * highlyprice nelastic' ffectof tax on ou'xJ::Iff; e oeve ,aonp"llll.'.n:,t:::T11,':j'H:'1"J1"*:f *,TJ; f;"fii:lTJ:#[:,"'Tr"*5["t"nli,ii"v "'" p"vinsheaxes.oadaxhas eemreducedn avour f ERPcharges'

%a ctcity-statekesngapglg:l ub]f L?l:::*::tj.?" t[':::til:ffi' Fora compaq""t;i5:;:;i;i-i"dil"- on pubtii,transport,,isey oits land transPortcongestion"no p'JJ"ting a high.qY?l'tyrbanenvironment'. To keep pubti"'i#r'"i aff6rdable,'the developmentof the public- in-tr"rir-u"turesfundedentirelyby hegovernment' -. Fares ar" 'egutai"o ny Land transp-ortutnotity

for MRT and PublicCouncilor buses'Evaiuationand relativeeffectiveness.Pub| ictransport ,"* i"""tendtohavesomeelementsofanaturalmonopo|y.TtIsparticularlY ith heMRTsYstem'. Bus operatorsare conc"ntratingmore on servinghighdemand outes ikeRoadikeouttving"aiJ'"Lir"i"nun'Jurongt."-::ly.:l-t^":il^ ,o.,,,r"ti.ns. E:l:J'::""J::1il;:",ffi;;il ;;,n""ire inrrequenrespiteesurationsvPrc

go!q'!u;he Singapore overnment.ofoursewourd ontinuewith tssuccessfuroriciesndealirgwith estrictingarownership ---r^-r:-^+r.^ pD crrcremo other oads o solve'GovernmentisalsoconsidenngextendingtheERPsystemtootherroad! i"*5:rl,"Srous attempts arsoneeded o persuadehe motoristso usepubricransport'

(b) Marking Scheme

-naerstan{ag3$! ed bY the SingaPore6i afinalytic discussion eferrlng r(;;;;;",;J O"i^J..rparative analysis fwhich s the.bettermeasure'__-----gv'sr 'rrrv 'r discussing the

@isof measut: : .issueof relative"tr"iiir"n"t, On measures o-reducerafficcongestionn generatiate economicprincipleso the ,.uouii;l ;t"'a oi S'pore'E'g' explanationf theoretical easureslike axes,c?mpqgl'setu' ' ------ ------'- -- --_-* nt on relativeFofeGltJatlveassessment asedon ec

@ACJC 009PrelimExamH2 Econ EssayQn3/p3 of 3

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