Assess whether government regulation is adequate and desirable in resolving the problem of traffic congestion


Market failure occurs whenever the price mechanism fails to allocate resources in a way that is deemed as socially desirable. As such, the market does not provide the ideal or optimal amount of a particular good. An optimum resource allocation cannot  be  achieved with the existence of externalities. Negative externalities arise whenever the production or consumption of a good incurs external costs beyond the producers and consumers involved in the market and these costs are not reflected in the prices  charged.

Traffic congestion occurs when there are too many cars on the road, given the road capacity. Therefore, it is necessary to note that policies implemented to reduce the problem of traffic congestion must tackle the problem of car ownership and car usage. Governments in the world have implemented a range of policies to tackle the problem of traffic congestion. These policies include taxation, quota systems and also improvement of the public transport system. In Singapore’s context, we also have the COE and ERP system. In the implementation of various policies, we need to consider the effectiveness in alleviating the traffic congestion levels and also the impact on the society.


Traffic congestion is an example of market failure in Singapore. We assume that the marginal private benefit (MPB) is equal to the MSB as there is the absence of positive externalities. Only private benefits and private costs are considered in the decision making process as a person drives, he would only take into consideration his private  cost e.g. fuel costs but not the external cost he imposes on others e.g. loss  of  productive hours and rise in pollution level. Thus, resulting in the divergence of MSC   and MPC, leading to an over-usage of cars at the market equilibrium since the socially optimum number of cars on the road should be at Qs where MSC = MSB i.e. the additional cost of having an extra car on the road is equal to the additional benefit of the last unit of car on the road. Society’s welfare can be increased by reducing the usage of cars.

1.     Taxation

Governments in many countries such as Singapore, Indonesia and Australia has implemented various forms of taxes to curb the problem of congestion, such as   motor vehicle tax, road tax and fuel tax.

  • To internalise the external cost to reduce the road usage, the government would impose taxes that is equal to marginal external cost.
  • Explain how the traffic congestion leads to market failure or deadweight loss using relevant examples and the aid of a diagram. When the tax is imposed, the MPC

curve shifts up by the amount of the tax to the MPC+tax curve. As a result, traffic   flow is reduced from 0Qm to the socially optimal level of 0Qs.


  • This policy of taxation is suitable if the country is able to obtain accurate estimates of the level of external cost and hence, the amount of tax or ERP charge. This is because overtaxing or overcharging may result in underutilising of roads while under-taxing or undercharging may still result in congestion. Therefore, for a developing country that has problems in data collection, the amount of tax imposed may not be optimal. Hence, this would not resolve the congestion problem adequately.
  • Consumers would have to bear higher tax burden and this may not be desirable for overall society. Taxes are regressive in effect and it may penalize the relatively  poorer consumers more than the richer ones. For controlling congestion, not all the car drivers contribute to congestion in a similar manner. Thus, implementation of tax is not equitable system in accounting the cost of congestion on non-drivers. In addition, taxes are a one-off payment so it does not discourage usage during peak hours.

1.     ERP system

  • To reduce congestion during peak hours, taxation in the form of Electronic Road Pricing (ERP) charges are imposed on road users. It is an electronic system of road pricing based on “pay-as-you-use” principle. With differential prices charged for different types of vehicles, like motorcycles, cars and heavy goods vehicles, it works on the principle of making the road user bear the total costs for the use of road   space which includes private costs and the specific external costs that each vehicle incurs. Additional ERP charges during peak periods force motorist to internalize the external cost of congestion and encourages some of these users to switch to non- peak periods or to use alternative modes of transport. To internalize the external

costs, a tax would bring private costs (MPC) closer to the social costs (MSC) and reduce traffic on the road from OQm to OQs to achieve the socially optimal level.


  • This policy may affect driving habits more than car ownership, in this shift towards a “pay-as-you-use system”. Car owners may take public transport during peak hours when ERP gantries are in operation, thereby easing congestion during peak  hours.  In addition, it may discourage consumers from purchasing cars due to the rise in   cost of owning a car. However, demand for car usage is rather price inelastic in Singapore. Although cost of car ownership takes up large proportion of income for many, it appears to be a necessity for existing car users who live a fast pace life and want a fast means of transport. Hence ERP may not deliver the intended results as the number of cars on the roads during peak hours may only drop less than proportionately in response to a rise in road pricing charge. Thus, ERP may not adequately reduce the number of cars.
  • However, ERP has not really helped to ease congestion on the highest demand  roads like Central Expressway beyond a temporary respite; that the ERP rate increases have little impact on travel behaviour. Motorists have to pay more yet still experience congestion or “start-stop” traffic on these priced roads, thus it has not been desirable for consumers.

2.     Direct controls through quotas

  • In Singapore, the government uses tradable permits to reduce the problem of congestion. Essentially, the government limits the number of cars that can be bought or sold. This is done through Certificate of Entitlement (COE), which are essentially tradable permits. The number of COEs determines the number of cars on the roads. And this number depends on the annual rate of car growth and the number  of vehicles deregistered in the previous period.
  • Possible to cap the number of vehicles to produce socially-optimal amount of  demand for road space and reduce congestion. However, this would mean that the public transport system must be able to support the rise in the users. If not, this   would add only burden to the public transport, resulting in another different set of problems that might worsen society welfare.


  • COE is effective in controlling car ownership, but it is a blunt instrument that  penalizes ownership rather than car usage. As a result, traffic congestion may not be reduced if car usage does not fall. Singapore should arguably shift away for COE to rely more on ERP that is directed at car usage.
  • Due to incorrect estimations of vehicle de-registrations, the growth in vehicle population has continually exceeded “allowable annual growth rate” determined by government. Consequently, congestion has not been successfully controlled.
  • However, without COE, the car population would rise substantially, thus increasing the demand for car  usage.  ERP rates would then have to be  set  at very high rates to effectively curb road usage, which is politically hard to implement and undesirable for the society.

3.     Improve public transport system and road system

  • Road expansion carried out to allow roads to accommodate increased number of vehicles to curb congestion pressures. Build more roads and expressways, widen existing roads to ease traffic flow, underground tunnels, etc.
  • Trains and buses upgraded and seen as effective. Able to shift  commuters away  from private vehicles to public transportation. Seen as viable alternative to driving. More frequent train service, more bus lanes and increased government expenditure on road and road projects increase the efficiency and convenience of public  transport, serving to contain congestion levels on roads. One way is to improve the existing infrastructure through building a more efficient public transport system. E.g.: The Circle Line in the Mass Rapid Transit system in Singapore and Dubai Metro project.
  • With the above policies in place to reduce car ownership and car usage, it is  therefore necessary for the government to improve public transport so as to make demand for private transport price elastic. Subsidies for public transport to keep travelling by public transport affordable and desirable for the consumers.


  • The difficulty in implementing this policy is to balance between providing  quality public transport and keeping costs low and hence, affordable for users. It is not possible to raise the fares as higher fares also induce people to stick with private transport. This may not adequately reduce the level of car ownership and it may also reduce their consumer welfare level.


  • As far as dealing with road congestion is concerned, the Singapore government has implemented a package of policies that seek to reduce traffic congestion by addressing car ownership, car usage and quality of public transport. Vehicle taxes, COE and ERP will raise the cost of owning cars and less people are unable to afford them. In addition, this may also increase the cost of production for business and

firms are forced to increase prices of goods and services. This leads to rise in the  rate of inflation which may reduce consumer welfare and material standard of living.

  • Government needs to continue shifting away from blunt tools to finer and more targeted tools to deal specifically with those who contribute to congestion, rather   than all motor vehicle owners in general. Also, government trying to expand city centre, away from traditional hubs of Raffles Place and Shenton Way. Future city centre to be in Marina South – will aid to reduce traffic volume in current city centre.
  • Overall, government has encountered some success in curbing congestion through the use of various demand-side and supply-side policies. However, congestion is still present and there needs to be continual adjustment to ensure the optimal amount of demand for road space is attained. Government also needs to consider the policy impact on various groups of people when such policies are implemented. This is to ensure that it will have an desirable effect on the society.

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