Explain and evaluate the Singapore government’s policies for reducing traffic congestion.


  • Governments will intervene when they are trying to achieve the microeconomic goals of equity of distribution and efficiency in resource allocation. In the case of intervention to reduce traffic congestion, the government is trying to reduce inefficiency in this case by addressing the market failure brought about by traffic congestion.
  • Market failure is the situation in which there isn’t the price mechanism does not bring about efficient allocation of resources and the welfare of society is not maximized.


Explain that the existence of traffic congestion indicates market failure

Market failure in the form of traffic congestion occurs

  • because the negative externalities brought about by traffic congestion are disregarded in car users’ decision making.
  • When considering whether to use the car, owners only consider the marginal private benefit (MPB) and marginal private cost (MPC) of using the car.
  • MPB of using the car includes convenience and the satisfaction derived from driving the car
  • MPC of using the car includes petrol cost, cost of servicing the car
  • The free market equilibrium will occur when MPC intersects MPB to give equilibrium quantity of Q1
  • However, car usage generates traffic congestion which generates negative externalities, which are costs borne by third parties who are not involved in the use of cars. Examples of MEC would include loss in man hours and hence output for the employers of the drivers caught in the traffic jam.
  • The presence of MEC will cause a divergence between MPC and MSC, as seen in the diagram. The socially optimal level of output is where MSC intersects MSC at E2, to give output Q2.
  • From society’s point of view, there is an overconsumption of cars, which is the usage of cars, of Q1Q2 units and the welfare of society is not maximized.
  • Additional cost of consuming Q1Q2 units is AE2Q2Q1 and the additional benefit is E2E1Q1Q2
  • Since additional cost is greater than additional benefit, there is a welfare loss represented by the triangular area of AE2E1
  • Explain how the COE system works (COE) and its limitations
    • COE represents a right to vehicle ownership and use of the limited road space (for 10 years)
    • It is a quota system as it limits the number of cars that can be on the road. In order to get a COE, one has to bid for the COE.
    • Bidding is an efficient way of allocating resources as the bidders would consider their satisfaction they would get when using the car and would then bid the maximum value they are willing to pay for the COE
    • This policy is easy to implement and monitor as it is illegal to buy a car without a COE
    • The quota system provides certainty of outcome by controlling the car population
    • However, this measure does not address the market failure caused by usage of cars. Rather, it targets the problem indirectly by controlling car ownership. While this could address the market failure brought about by car usage, the problem is that it can lead to over-correction, i.e. too blunt, where people who may not use the car often or do not use the car during peak hours,  are also required to pay for the COE, discouraging them from buying a car.
    • On the other hand, the measure might be counter-productive. After having paid a large sum of premium for COE, Singaporeans might use their cars even more. i.e. to spread it the fixed cost.
    • Also, it might result in inequity of distribution issues, as those who need the car more may not be able to afford the COE premium.
  • Explain how ERP works and its limitations
    • ERP is an electronic toll collection scheme to manage the traffic by way of road pricing. It is a usage-based system
    • Cars have to pay tolls when they pass by ERP gantries, located at roads leading into the Central Business District and expressways
    • This increases the marginal private cost of using cars.
  • The amount of tax they pay would be equal to the amount of MEC at quantity Q2. This causes the drivers to internalize the external cost associated with excessive car usage.
    • This measure is easy to implement as all vehicles are fitted with the necessary equipment to allow for payment of the fee when they pass by the gantries.
    • However, the exact amount of tax to be imposed is not easily determined and the government may over-correct the market failure by imposing a tax that is too high an amount.
    • The amount of tax being imposed currently is also negligible compared to the premium that was paid for COE, thus reducing the effectiveness of this policy.
  • Explain how the improvement of public transport would help in reducing the market failure brought about by congestion and its limitations
    • In recent years, Singapore’s public transport system has seen several improvements
    • The opening of the Circle Line in 2009 and Downtown Line in 2013 aimed to improve the connectivity of the rail network in Singapore.
    • If the vehicle owners switch to public transport, it will greatly reduce the negative externalities brought about by traffic congestion.
    • However, it is not easy to get the rich and wealthy to switch to taking public transport as they may view public transport as an inferior good. Furthermore, if the drivers have already paid for a car, they would want to utilize their cars as much as they can, driving a car also brings more convenience as compared to taking public transport.
    • Also, the proposed improvements to public transport, which sees small towns being connected by the rail network, are only expected to finish in the year 2030. This is a long-term solution and its effects would only be seen in the long run.


  • In order to address the market failure brought about by traffic congestion, a multi-pronged approach is required where policies implemented would address the limitations of the other policies. For Singapore, policies are aimed at discouraging the use of cars by making it more expensive to do so and by making alternatives like public transport more attractive.


  • The policies that are currently implemented do not solve the problem of market failure completely. However, this may be the best set of solutions that the Singapore government has to deal with the problem, as there has been fine-tuning to both COE and ERP since their implementation.
  • Although the COE system does not seem to have fulfilled its purpose of discouraging car usage, it does not mean that it should be discontinued. The bidding process ensures efficiency. It also allows adjustment for increases in income over time. As consumers’ income increases, they would be paying more for COE, unlike the ERP measure. As mentioned earlier on, the COE bidding system results in greater inequity. Whether this is worth it depends on whether the society values efficiency over equity. 
  • In time to come, as Singapore sees a further increase in income, the current ERP rates might no longer be effective in deterring car usage. Perhaps the government can consider raising ERP rates by a substantial amount to cause drivers to feel a greater pinch when using their cars in the city center.