Discuss whether the Singapore government adopts appropriate policies to achieve its microeconomic aims.              

This question requires students to analyse, evaluate and discuss the microeconomic aims of the Singapore government while offering different points of view. The appropriateness of the policies especially with regards to achieving the microeconomic aims must be evaluated and analysed. Students anticipating the higher end of the marks are expected to discuss a variety of diverse issues and not confine themselves to narrow perspectives.  

The market and price mechanism, and therefore market based solutions, determine many outcomes in the context of Singapore. However, policies are required in areas where the free market fails to function efficiently in achieving microeconomic aims. Ideally, students should discuss a merit/demerit good, a good with negative externality, a public good and the problem of income distribution. They should explore a few diverse examples such as education, the case of traffic congestion, provision of public goods and workfare income supplements. Policies to tackle problems in these areas should be discussed, accompanied by relevant theories, appropriateness of the policies implemented and these should be evaluated.

Suggested Outline

Introduction

Microeconomic aims of the government will be to achieve economic (social) efficiency and equity in income distribution.

Body

  1. Explain the microeconomic aims
  2. Economic efficiency is the production of the right mix of goods and production on the long run average cost. Output is also at the social optimal level where MSB=MSC without externalities.
  3. Equity income distribution is to achieve distribution of income where the proportion of income paid is distributed in the same proportion as the number in the labour force.

However, in the working of the free market of consumers and firms, there is potential for inefficient allocation in resources and issue of inequity by the price mechanism. Government thus must intervene to achieve pareto optimality and equity in income distribution.

  •  Explain the policies to achieve the aims
  1. INTERVENTION DUE TO COMPLETE MARKET FAILURE

 Public goods

A pure public good is one that provides non-excludable and non-rival benefits to all people in a given society. Non-excludability means that it is technically impossible or extremely costly to exclude any individual from the benefits of a good once it is provided. Non-rival consumption means consumption of a good by any one individual does not reduce the amount of it available for consumption by any other individual. As a consequence of these characteristics, a public good is subject to the free rider problem; that is, its benefits can be received without making payment. There is also zero marginal cost in its provision for another user; that is, it is not possible to allocate resources by the private market as price equals marginal cost is also zero. Given this, rational producers won’t supply a good that no one is likely to pay for. Hence no market exists for the public good.

The government will thus provide public goods to its people. This is done largely due to the positive externalities posted by the public good and its provision by the government will enable the economy to achieve its microeconomic and macroeconomic goals.

Policies implemented in Singapore

Government provision of street lights, public roads, national defence etc. The provision is allotted through tax revenues. However, the size of the government expenditure on public goods is subjected to other demands on tax revenue. There must be a cost benefit analysis done to consider a particular use of tax revenue.

Issue on appropriateness

Policies adopted are appropriate as the government undertakes production and provision of public goods in Singapore and thus solves the problem of zero provision by the free market. However, whether the correct amount of public good is being provided by the government remains to be debatable.

  • INTERVENTION DUE TO PARTIAL MARKET FAILURE

Externalities

These are spillover benefits/costs on third parties where no payments and compensations are paid or received.

  • Case of merit / demerit goods. These are goods deemed to be intrinsically good / bad whose consumption should be increased / reduced due to under-provision / under-consumption or over-provision / over-consumption. Correction of the problem is through tools such as subsidies / taxes, direct provision / prohibition, regulation and correction of information failure.
  • Case of goods with positive/negative externality. These are goods deemed to be intrinsically good / bad whose production should be increased / reduced. Correction of the problem is through tools such as subsidies / taxes, regulation, carbon trading and providing alternatives.

Education as a case of positive benefits (merit good)

  • Application: Education is an important form of positive externality in consumption because of its contribution to economic growth.
  • Private benefits: the consumer becomes more intelligent, greater career prospects and income, etc.
  • External benefits: enhanced productivity and importance of human capital to the third party, which is the society.

With respect to education, the level of consumption of education is where MPB = MPC = MSC and society’s welfare is not being maximised. The under-provision/consumption will lead to an amount of welfare loss referred to as deadweight loss. (Diagram)

Policies implemented in Singapore

Since the market fails to consume the optimal level of the good, the Singapore government implements policies to encourage private consumption of education:

  • Offering consumers a subsidy equal to the MEB. Consumers internalise the external benefits of education and demand for education will shift to MSB. Assuming no external cost, the production and consumption of education will reach the optimal level.
  • Stimulate private production of merit goods by subsidizing private producers because the increase in production will also increase consumption. This is illustrated by a rightward shift in the supply curve for education till it intersects MPB at optimal output.
  • Legislation. All children in Singapore have to undergo 10 years of compulsory education. Increases MPB.
  • Education, being a merit good, not only generates external benefits but is also socially desirable. Thus, the Singapore government undertake the provision for education in Singapore in an effort to ensure that education is affordable (equity issue) and is provided for all.
  • Correction of information failure where appropriate

Evaluation

  • Difficulties in measuring the external benefit (external benefit from the consumption of education changes as one move up to a higher educational level).

Issue on appropriateness

  • Implementation of legislation with regards to compulsory education has been appropriate in Singapore as there exist a system to track those who are not registered in primary school / dropouts. In addition, there is global recognition that the Singapore workforce has a relatively high literacy rate and educational level.
  • Implementation of subsidy has its limitation as ability to continue education at a higher level does not depend on price alone. Grades and personal ambition also determines the socially optimal level of education consumed.
  • The areas where the Singapore government can improve in an effort to promote education are in the aspect of:
    • Talent grooming
    • Skills retraining and upgrading of workers and
    • The provision of more means for individuals to pursue higher education.

Traffic congestion as a case of negative externality

  • Application: In Singapore, traffic congestion occurs in the city area and the main roads leading to it during morning and evening peak periods. A motorist would only consider if the private marginal benefit (MPB) exceeds the private marginal cost (MPC) of road use.
  • Private benefit: benefits gained at their destination.
  • Private cost: petrol, engine oil, maintenance, parking charges, depreciation, taxes, other charges and time cost of travel (opportunity cost of sitting in the car is the next best alternative activity you could have been pursuing.)
  • Externality: arises when congestion causes other motorists to suffer from higher opportunity cost of travel time and other costs. Illustrated by divergence between MPC and MSC. (Diagram)
    • Assuming no positive externality, MSC = MPC + MEC
    • An additional motorist using a congested road would slow down the traffic and increase the cost and journey time of the motorist and other motorists (3rd party).
    • An additional cost is the reduction in the quality of environment to others (3rd party). For example, contribution to global warming and acid rain.

Without government intervention, the actual level of traffic flow would be at where MPB = MPC. However, the socially efficient level of traffic flow is lower at where MSB = MSC. Assuming no positive externality, motorists would not take into account the longer waiting time and other costs that would be imposed on other motorists nor the negative effect of pollution on society. Hence, this results in excessive use of roads in the city during peak periods.

Policies implemented in Singapore

To reduce the problem of over usage of roads, the Singapore government has implemented a series of measures to reduce this problem. Tools for correcting inefficient allocation of resources include taxes (Road Tax, Additional Registration Fee, Excise duty on cars & Registration tax), regulation (COE, ERP, exhaust filters, inspections on car conditions etc.) and others (including provision of quality public transport, green cars, etc.)

Electronic Road Pricing (ERP)

Additional ERP charges during peak periods force motorist to internalize the external cost of congestion and pollution and encourages some of these users to switch to non-peak periods or to use alternative modes of transport. The effect is illustrated by a shift in the MPC to the MSC. This helps to bring down the level of road usage to the optimal level.

Provision of quality public transport

To ensure the ERP is more effective, the provision of frequent, reliable and affordable public transport is necessary as an alternative to private transport.

Evaluation

Difficulties in

  • Identifying 3rd party being affected.
  • Measuring the opportunity cost of longer waiting time and impact on the environment.
  • Estimating the cost of environmental pollution accurately as pollution do cross national borders.

Issue on appropriateness

So far, COE and ERP have been quite successful and appropriate in curbing car ownership and car usage during peak hours. COE has been an appropriate policy because the additional cost of owning a car (which itself is already very expensive) would deter potential car buyers from getting one (adding to the congestion). Implementing COE in Singapore is also easy since every car buyer need to purchase a COE before they can purchase and register their vehicle. In the near future, however, limitations to the use of COE may surface. As the national income and material SOL of Singapore increases, COE may not be appropriate in curbing car ownership as individual’s purchasing power increases. This is evident in the recent increase in the number of car ownership. Thus, there is a need for the Singapore government to address the flexibility of the COE scheme so as to match up with current economic changes (may need to increase COE charges as economy progresses). There is also an impending need for the government to ensure that the supply of road space meet up with increase in car ownership.

ERP has been appropriate in curbing congestion especially during peak hour in Singapore since Singapore is a small country and thus implementation and monitoring are made much easier. In addition, there is sufficient flexibility in the ERP system as the ERP charges are made to vary according to the time of usage and the routes taken. However, if the demand for usage of the road is price inelastic (the motorist may only have one route to reach their destination), then ERP will have its limitation in curbing traffic congestion effectively.

Market Dominance

The case of imperfect markets such as monopoly and oligopoly.

  • Price is greater than marginal cost due to its market power (show diagram).
  • Producing an output at less than pareto optimal à misallocation of resources. Both consumers and society’s welfare can be affected like the periodic increase in transport fares.

Government regulates such markets by requiring them to set price at average cost and marginal cost (a diagram to show the increase in output and lower price). There will be a need to subsidize the monopoly when they are required to set price at marginal cost.

Evaluation

  • However without profits, the monopoly might not produce innovative goods and a wider range to meet the demand of consumers.
  • The subsidy by the government might be in the long run strengthening the monopoly power that it was meant to curb.
  • A better solution might be to allow small periodic price increases like 1-2 cents per ride on transport network.

Issue on appropriateness

Policies adopted are appropriate as the government undertakes measures to protect the interest of consumers and society while balancing the needs of the producers.

Uneven income distribution

Nature of problem

There is a widening income gap in Singapore and this is a potential problem. It will lead to the worsening of inequity issues in Singapore (e.g. the poor may not have the ability to consume healthcare services).

Policies implemented in Singapore

In an attempt to overcome the issue of widening income gap in Singapore, the Singapore government introduced the progress package in 2006 and 2010 and the Workfare scheme in 2007. The Singapore government introduced Workfare in an attempt to supplement the wages and savings of older low-wage workers.

The Government will reduce the CPF contributions for the older low-wage workers while introducing the Workfare income supplements for them. This will help to increase the older low-wage workers take-home pay, make them employable and also help to beef up their savings in their CPF accounts by the provision of Workfare income supplements.

The principal target group of Workfare are

  • Older full-time workers aged above 45 years who earn $1,000 or less.
  • Workfare benefits will also extend to a wider group those above 35 years who earn $1,500 or less, but at a lower rate.

Issue on appropriateness

Policy is appropriate as it will benefit the older low-wage workers who are usually at the extreme lower end of the income range in Singapore. However, the policy has its limitation as it does not tackle the bigger lower-middle-class income group in Singapore. In addition, the root cause of the problem of the widening income gap in Singapore is that in the lower-end jobs wages remain stagnant while in the higher-end jobs wages kept increasing. This has been a common problem in most developing countries in the face of globalisation. As such, there is an impending need for the Singapore government to look into the aspect of job redesigning and restructuring. There is also a need to promote more skills retraining and upgrading in Singapore for the lower-wage workers to enable them to fetch a higher salary and to make them more employable.

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