Evaluate the current microeconomic policies taken by the Singapore government to achieve a more efficient allocation of resources.

In Singapore, there are circumstances in which distortions prevent the price mechanism from allocating resources efficiently, resulting in market failure. Market failures provide one of the major justifications for government intervention in the economy and the Singapore government implements a range of microeconomic policies currently in an attempt to achieve a more efficient allocation of resources.

In this essay, the different types of examples of market failures and the microeconomic policies taken by Singapore government will be discussed.

Usage of roads arising to traffic congestion constitutes as a form of market failure caused by the presence of negative externalities. When negative externalities are present, there are costs to third parties that are not taken into account by those who undertake the activity. In deciding whether to drive into the city area during peak hours of the day, motorists weigh their private marginal benefit (PMB) against private marginal cost (PMC) of car usage. Motorists’ private benefits would include the time saved on waiting for public transport and the convenience of driving their own vehicles. Their private costs include the cost of petrol and parking fees. Congestion on the roads increases fuel consumption and wear and tear of the car not only for these motorists, but for other road users as well. Thus, when motorists add to traffic congestion, there are additional costs imposed on other road users. In addition, air and noise pollution from the traffic congestion may lead to health-related problems among other people such as pedestrians. Due to the external costs incurred, there is a divergence between private cost and social cost, resulting in market failure. As seen in Figure 1, private individuals will consume at Qe amount of road usage, where private marginal cost (PMC) is equivalent to private marginal benefit (PMB). He does not consider the negative externalities arising from his consumption. As such, the negative externalities generated cause social marginal cost (SMC) and private marginal cost to diverge, where SMC>PMC at Qe. Moreover, at Qe, SMC>SMB, where society values an extra unit of road usage less than what it would cost society to produce it. There is over-usage of roads, where Qe > Qs, resulting in a deadweight loss (DWL) as shown in the shaded area in Figure 1. Society as a whole could be made better off if the current level of road usage is decreased to the socially efficient level at Qs.

The Singapore government currently levies taxes on the usage of some roads to discourage usage of these roads through the implementation of the Electronic Road Pricing (ERP) system. This would effectively shift the PMC for road usage to PMC+ tax, by the amount of the tax (equivalent to EMC at Qs as shown in Figure 1). As the cost of using some roads is now higher, the equilibrium quantity of road usage would fall to Qs and the deadweight loss is eliminated. Hence, the implementation of the ERP system by the Singapore government is effective in achieving a more efficient allocation of resources. The ERP system allows the optimal use of the road network by making those who contribute to congestion bear a share of the cost of easing it.

However, the Singapore government may not be able to assess the monetary value of the external costs resulting from road usage, leading to the inability to determine the right amount of tax to be levied on road usage to achieve the socially optimum level, Qs. In the case where there is over taxation, it may lead to a loss of economic activities due to the level of road usage which is below the socially efficient level, resulting in a loss of welfare to society.

Merit goods are goods that exhibits positive externality and deemed to be socially desirable by the government. If merit goods were provided through the free market, an insufficient level of the goods would be consumed. The price mechanism under-allocates resources for the merit goods because individuals do not take into account the positive externalities arising from the consumption of such goods.

Education is an example of merit goods that exhibits positive externalities from consumption. A person will only take into account his private costs (costs of education services, textbooks, stationery, etc) and private benefits (of improving his literacy and the increase in wage due to his higher level of education). Thus the market equilibrium level is at Qe, whereby, PMB=PMC. However, private individuals do not take into account external benefits, which is the benefit that the nation may receive from an educated workforce. With a more educated workforce, skills level will rise and productivity will rise too. As such, the nation may derive greater output and an average individual would enjoy a higher standard of living.

Thus, the positive externalities will lead to the divergence of private benefit and social benefit as shown in the diagram above, resulting in SMB>PMB. In addition, at Qe, SMB is greater than SMC. Hence, society values an extra unit of education more than what it would cost society to produce it. The socially efficient level is at Qs, where SMC=SMB. Given that Qe<Qs, the level of consumption of education is less than optimum. The shaded triangle represents the welfare loss to society as a result of this under-allocation of resources. Society as a whole could be made better off if the current level of education were increased to the socially efficient level at Qs.

The Singapore government may intervene by providing subsidies to encourage the consumption of education. Subsidizing the consumers of education would reduce private cost of consuming education, and shift the PMC curve to the right by the amount of the subsidy (equivalent to EMB at Qs as shown in Figure 2), to PMC’. This microeconomic policy will ensure that the consumption of education is optimum, at Qs, and the deadweight loss is eliminated.

The advantage of this policy is that it allows the market mechanism to work. However, similar to the microeconomic economic policy on traffic congestion, due to imperfect information, it is difficult to assess the monetary value of the external benefits that results from education.

The Singapore government may also use legislation to achieve a more efficient allocation of resources in the market for education. Under the Compulsory Education Act passed in 2000. This policy will increase the demand for education, moving the society closer towards the optimal level at Qs.

The advantage of imposing legal restrictions is that they are relatively easy to understand and administer. For the law to be effective, the penalties for breaking the law can be made sufficiently harsh. One potential problem that could arise out of such a solution is that it can be costly to monitor the level of compliance.

The Singapore government currently uses a range of microeconomic policies such as taxes, subsidies and legislations to correct the problems of market failures. Although these policies may not be able to achieve the socially efficient level of consumption of some goods, they ensure that the allocation of resources is more efficient than without government’s intervention. On the other hand, if the Singapore government is successful in achieving the socially efficient level of consumption of some goods, the government has to ensure that the lower income groups are able to gain access to these goods. This is because there is a possibility that the lower income group will be priced out of the market as the market is based on the ability and willingness to pay.

Leave a Comment

Your email address will not be published. Required fields are marked *