Вы находитесь на странице: 1из 18

Written by: Edmund Quek

Written by: Edmund Quek CHAPTER 10 MARKET FAILURE LECTURE OUTLINE 1 INTRODUCTION 2 EXTERNALITIES 3

CHAPTER 10

MARKET FAILURE

LECTURE OUTLINE

1

INTRODUCTION

2

EXTERNALITIES

3

IMPERFECT INFORMATION

4

MARKET IMPERFECTIONS

5

PUBLIC GOODS

6

IMMOBILITY OF FACTOR INPUTS

7

INCOME INEQUITY

8

MEASURES TO CORRECT MARKET FAILURES

8.1

Merit goods

8.2

Demerit goods

8.3

Pubic goods

8.4

Market imperfections

8.5

Limitations

9

MEASURES TO CORRECT THE MAREKT FAILURE OF HEALTHCARE IN SINGAPORE

10

MEASURES TO CORRECT THE MAREKT FAILURE OF TOBACCO IN SINGAPORE

11

MEASURES TO ADDRESS THE MAREKT FAILURE OF INCOME INEQUITY IN SINGAPORE

References John Sloman, Economics William A. McEachern, Economics Richard G. Lipsey and K. Alec Chrystal, Positive Economics G. F. Stanlake and Susan Grant, Introductory Economics Michael Parkin, Economics David Begg, Stanley Fischer and Rudiger Dornbusch, Economics

Economics David Begg, Stanley Fischer and Rudiger Dornbusch, Economics © 2011 Economics Cafe All rights reserved.
Economics David Begg, Stanley Fischer and Rudiger Dornbusch, Economics © 2011 Economics Cafe All rights reserved.

© 2011 Economics Cafe All rights reserved.

Page 1

Written by: Edmund Quek

Written by: Edmund Quek 1 INTRODUCTION A market failure occurs when the free market fails to

1 INTRODUCTION

A market failure occurs when the free market fails to achieve social efficiency or income

equity. Social efficiency is achieved when marginal social cost (MSC) is equal to marginal social benefit (MSB) where MSC is the sum of marginal private cost (MPC) and marginal external cost (MEC) and MSB is the sum of marginal private benefit (MPB) and marginal external benefit (MEB). External costs and benefits, or simply externalities, are costs and benefits of consumption or production experienced by society other than the producers or the consumers. This chapter gives an exposition of market failure.

2 EXTERNALITIES

External benefits, or positive externalities, lead to a divergence between MSB and MPB resulting in under-consumption or under-production and this is a matter of concern particularly if the goods are merit goods. Merit goods are goods that society deems desirable and the government thinks people should be encouraged to consume. Examples

of merit goods include education and healthcare.

In the above diagram, due to external benefits, the MSB is higher than the MPB. For example, the consumption of education produces external benefits such as a more innovative labour force. Therefore, the equilibrium output level (Q E ) where MPB is equal

to MPC is lower than the socially efficient output level (Q S ) where MSB is equal to MSC.

The deadweight loss, which is the loss of surplus due to market failure or government intervention, is represented by the shaded area.

External costs, or negative externalities, lead to a divergence between MSC and MPC resulting in over-consumption or over-production and this is a matter of concern particularly if the goods are demerit goods. Demerit goods are goods that society deems undesirable and the government thinks people should be discouraged to consume. Examples of demerit goods include tobacco and alcohol.

to consume. Examples of demerit goods include tobacco and alcohol. © 2011 Economics Cafe All rights
to consume. Examples of demerit goods include tobacco and alcohol. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 2

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, due to external costs, the MSC is higher

In the above diagram, due to external costs, the MSC is higher than the MPC. For example, the consumption of tobacco produces external costs such as air pollution in the form of second-hand smoke. Therefore, Q E is higher than Q S . The deadweight loss is represented by the shaded area.

3 IMPERFECT INFORMATION

Imperfect information about beneficial effects causes perceived MPB to be lower than true MPB resulting in under-consumption and this is a matter of concern particularly if the goods are merit goods. Merit goods are goods that society deems desirable and the government thinks people should be encouraged to consume. Examples of merit goods include education and healthcare.

to consume. Examples of merit goods include education and healthcare. © 2011 Economics Cafe All rights
to consume. Examples of merit goods include education and healthcare. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 3

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, the perceived MPB (MPB P ) is lower

In the above diagram, the perceived MPB (MPB P ) is lower than the true MPB (MPB). For example, the perceived MPB of education is lower than the true MPB as many people do not fully realise the beneficial effects. Therefore, the equilibrium output level (Q E ) where MPB is equal to MPC is lower than the socially efficient output level (Q S ) where MSB is equal to MSC. The deadweight loss, which is the loss of surplus due to market failure or government intervention, is represented by the shaded area.

Imperfect information about detrimental effects causes perceived MPB to be higher than true MPB resulting in over-consumption and this is a matter of concern particularly if the goods are demerit goods. Demerit goods are goods that society deems undesirable and the government thinks people should be discouraged to consume. Examples of demerit goods include tobacco and alcohol.

In the above diagram, the perceived MPB (MPB P ) is higher than the true MPB (MPB). For example, the perceived MPB of tobacco is higher than the true MPB as many people do not fully realise the detrimental effects. Therefore, Q E is higher than Q S . The deadweight loss is represented by the shaded area.

4 MARKET IMPERFECTIONS

Market imperfections are deviations from the assumptions of perfect competition that lead to under-production and this is a matter of concern particularly if the market is monopolistic. A monopolistic market is a market where there is a single large firm selling a unique product that has no close substitutes. Due to lack of competition in the market, a monopoly is a price-setter in the sense that it is able to set its price by setting its output level. The presence of barriers to entry in a monopolistic market allows a monopoly to make supernormal profit in the long run. A monopoly has substantial market power which it can use to restrict output and charge a higher price to make more profit resulting in under-production.

a higher price to make more profit resulting in under-production. © 2011 Economics Cafe All rights
a higher price to make more profit resulting in under-production. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 4

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, the socially efficient output level where MSB is

In the above diagram, the socially efficient output level where MSB is equal to MSC is Q S . However, if the monopoly increases its output level above Q M where its MPC is equal to its MR, the increase in its total cost will be greater than the increase in its total revenue as its MPC will be higher than its MR. If the happens, its profit will fall. Therefore, the monopoly will restrict its output level to Q M which is lower than Q S . The deadweight loss, which is the loss of surplus due to market failure or government intervention, is represented by the shaded area.

5 PUBLIC GOODS

Public goods will not be produced in the absence of government intervention. Public goods are goods that are non-rivalrous and non-excludable such as national defence and street lighting. A good is non-rivalrous when the consumption of the good by a consumer will not reduce the amount available to other consumers. In other words, an extension of the good to one more consumer will not reduce the amount available to current consumers. A good is non-excludable when the person who pays for the good cannot prevent those who do not from consuming it. Since people can consume public goods without paying for them, they are unwilling to pay for them. Therefore, non-excludability leads to the free-rider problem resulting in the non-provision of public goods.

the free-rider problem resulting in the non-provision of public goods. © 2011 Economics Cafe All rights
the free-rider problem resulting in the non-provision of public goods. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 5

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, the demand curve shows the maximum price that

In the above diagram, the demand curve shows the maximum price that consumers are able and willing to pay at each quantity. If the good is excludable, it will be the MPB. However, since a public good is non-excludable, it is zero which means that the demand curve is a horizontal line which coincides with the quantity axis. In this case, the demand curve (D) and the supply curve (S) do not intersect which leads to the non-provision of the public good. However, the socially efficient output level Q S . The deadweight loss, which is the loss of surplus due to market failure or government intervention, is represented by the shaded area.

6 IMMOBILITY OF FACTOR INPUTS

Immobility of factor inputs may prevent a market from achieving equilibrium resulting in social inefficiency. When changes in demand occur, firms will respond by changing their output and hence the amount of factor inputs they employ. However, owners of factor inputs may be slow to respond due to immobility. For instance, workers may be immobile occupationally or geographically. Occupational immobility occurs when workers do not have the relevant skills and knowledge to move to the industry immediately. Therefore, they need time to undergo education and training before they can move to the industry. Geographical immobility occurs when workers do not reside in the place where the industry is located. Therefore, they need time to relocate before they can move to the industry. As workers move to the industry over time and hence the market moves towards the equilibrium, the equilibrium moves and this causes the market to be in a constant state of disequilibrium resulting in social inefficiency.

in a constant state of disequilibrium resulting in social inefficiency. © 2011 Economics Cafe All rights
in a constant state of disequilibrium resulting in social inefficiency. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 6

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, the demand (D 0 ) and the supply

In the above diagram, the demand (D 0 ) and the supply (S 0 ) lead to the equilibrium (e 0 ). When the demand changes from D 0 to D 1 , the equilibrium changes from e 0 to e 1 . However, as the market moves slowly to the new equilibrium (e 1 ) due to immobility of factor inputs, the demand changes again from D 1 to D 2 which leads to another new equilibrium (e 2 ).

7 INCOME INEQUITY

Income inequity may result in some goods and services not being allocated to the people who need them more. Effective demands are demands that are backed by the ability to pay. Ineffective demands are demands that are merely driven by the willingness to buy. The free market only responds to effective demands which means that it only distributes goods and services to the people who have the willingness and the ability to pay for them. However, the ability to pay does not reflect needs and hence individuals who need some goods and services but do not have the ability to pay for them have to go without the goods and services. This is likely to happen if the distribution of income in the economy is inequitable, with high income individuals who have high ability to pay pushing up the prices of some goods and services, keeping low income individuals out of reach of those goods and services. Therefore, income inequity may lead to an undesirable allocation of goods and services to individuals in the sense that some goods and services may not be allocated to the people who need them more. This is a matter of concern particularly if the goods and services are necessities such as food, water, housing, education and healthcare. In the absence of government intervention, the free market may lead to gross income inequity.

intervention, the free market may lead to gross income inequity. © 2011 Economics Cafe All rights
intervention, the free market may lead to gross income inequity. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 7

Written by: Edmund Quek

Written by: Edmund Quek 8 MEASURES TO CORRECT MARKET FAILURES 8.1 Merits goods To correct the

8

MEASURES TO CORRECT MARKET FAILURES

8.1

Merits goods

To correct the market failure of merit goods, the government can give a subsidy to firms to induce them to increase output.

In the above diagram, a per-unit subsidy leads to a fall in the MPC curve. If the new MPC curve is MPC’, the new equilibrium output level (Q E ’) will be equal to Q S .

Apart from the use of indirect subsidy, the government can take other measures to correct the market failure of merit goods. Take education for example. The government can give a subsidy to consumers of education. It can pass a regulation to make a certain number of years of education compulsory for every child. The government can provide education directly alongside private educational institutes. It can educate the public through campaigns to increase the awareness of the beneficial effects of education.

8.2 Demerits goods

To correct the market failure of demerit goods, the government can impose a tax on firms to induce them to decrease output.

government can impose a tax on firms to induce them to decrease output. © 2011 Economics
government can impose a tax on firms to induce them to decrease output. © 2011 Economics

© 2011 Economics Cafe All rights reserved.

Page 8

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, a per-unit tax leads to a rise in

In the above diagram, a per-unit tax leads to a rise in the MPC curve. If the new MPC curve is MPC’, the new equilibrium output level (Q E ’) will be equal to Q S .

Apart from the use of indirect tax, the government can take other measures to correct the market failure of demerit goods. Take tobacco for example. The government can pass a regulation such as prohibiting smoking in public places such as shopping malls, food centres and entertainment outlets. It can prohibit people under a certain age from smoking. The government can educate the public through campaigns to increase the awareness of the harmful effects of smoking.

8.3 Public goods

The market failure of public goods can only be corrected by direct provision. For instance, national defence and street lighting are provided by the Singapore government directly through tax.

8.4 Market imperfections

The market failure of market imperfections may be corrected by giving a subsidy to the monopoly to induce it to increase output.

by giving a subsidy to the monopoly to induce it to increase output. © 2011 Economics
by giving a subsidy to the monopoly to induce it to increase output. © 2011 Economics

© 2011 Economics Cafe All rights reserved.

Page 9

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, a per-unit subsidy leads to a fall in

In the above diagram, a per-unit subsidy leads to a fall in MPC. If the new MPC is MPC’, the new profit-maximising output level (Q M ’) will be equal to Q S .

Apart from the use of indirect subsidy, the government can take other measures to correct the market failure of market imperfections. The government can pass a regulation that requires the monopoly to charge a price equal to its marginal cost or average cost and these are commonly known as marginal cost pricing and average cost pricing. It can also nationalise the market to produce the good itself.

7.5

LIMITATIONS

The measures to correct market failures are subject to several limitations. Since external costs and benefits cannot be known precisely, the government may have difficulty in determining the amount of tax or subsidy needed to correct a market failure. The passing of regulations requires the setting up of regulatory bodies to ensure that people comply with the regulations and these enforcement costs can be rather high. Education is not legally binding which means that it is not mandatory for people to respond to it and its effects will only be realised in the long run. State-owned firms do not need to consider factors such as profitability and survival and hence are more likely to be x-inefficient and hence productively inefficient than private firms. In an attempt to make more supernormal profit, the monopoly may provide false information about its revenue and cost structures to the government and hence the use of MC pricing and subsidy may not correct the market failure of market imperfections.

subsidy may not correct the market failure of market imperfections. © 2011 Economics Cafe All rights
subsidy may not correct the market failure of market imperfections. © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 10

Written by: Edmund Quek

Written by: Edmund Quek 8 MEASURES TO CORRECT THE MAREKT FAILURE OF HEALTHCARE IN SINGAPORE Healthcare

8 MEASURES TO CORRECT THE MAREKT FAILURE OF HEALTHCARE IN SINGAPORE

Healthcare is a market failure because it will be under-consumed in the absence of government intervention due to three reasons: positive externalities, imperfect information and market imperfections.

Subsidy The Singapore government gives a subsidy to public hospitals for the provision of subsidised healthcare to increase the supply. The amount of subsidy that consumers of healthcare at public hospitals will receive depends on their income and the type of ward accommodation they choose. For non-working consumers, the amount of subsidy that they will receive depends on the value of their residential property and the income of their immediate family members. A subsidy on healthcare will lead to a fall in the cost of production and hence a rise in the supply. When this happens, the price of healthcare will fall which will lead to a rise in the quantity demanded and this may correct the problem of under-consumption.

In the above diagram, a subsidy on healthcare leads to a fall in the MPC curve. If the new MPC curve is MPC’, the new equilibrium output level (Q E ’) will be equal to Q S .

Benefits and limitations Giving subsidy to correct the market failure of healthcare in Singapore has its benefits and limitations. First, a subsidy on healthcare expressed as a percentage of income is higher for low income individuals than for high income individuals. Therefore, a subsidy on healthcare leads to an improvement in income equity. Second, the use of means-testing in public hospitals in Singapore means that low income individuals receive more subsidy than high income individuals which further improves income equity. Notwithstanding the benefits, there are several limitations. First, the external benefits of healthcare cannot be known precisely. Therefore, if the subsidy per unit of output given by the government is

if the subsidy per unit of output given by the government is © 2011 Economics Cafe
if the subsidy per unit of output given by the government is © 2011 Economics Cafe

© 2011 Economics Cafe All rights reserved.

Page 11

Written by: Edmund Quek

Written by: Edmund Quek not equal to the marginal external benefits, it will not help to

not equal to the marginal external benefits, it will not help to achieve the socially efficient output level. Second, subsidising healthcare puts a strain on the government budget which may compel the government to decrease expenditure in other important areas such as education and infrastructure which may result in adverse consequences for the economy in the long run.

3M framework The Singapore government has created the 3M framework to increase the demand for healthcare. The Singapore government has set up Medifund to help the very poor pay for their healthcare at public hospitals. Medifund is an endowment fund set up by the Singapore government with capital injections coming from budget surpluses. The interest income from Medifund is used to help the very poor who cannot afford the subsidised charges at public hospitals pay for their healthcare. The Singapore government has introduced a compulsory medical savings scheme known as Medisave. Under the scheme, working citizens in Singapore are required to make monthly contributions to their Medisave account which can be used to pay for their healthcare. The Singapore government has set up an optional medical insurance scheme known as MediShield. Under the scheme, a person is automatically covered unless he opts out and the insurance premium can be paid through Medisave.

Benefits and limitations Creating the 3M framework to correct the market failure of healthcare in Singapore has its benefits and limitations. First, Medifund does not only increase the demand for healthcare in Singapore, but it also ensures that healthcare is accessible to everyone which helps address the market failure of income inequity. Second, unlike using subsidy, Medisave and MediShield do not require the Singapore government to incur substantial expenditure. Notwithstanding the benefits, there are several limitations. First, Medifund only covers a limited range of healthcare services. Second, only a small proportion of the monthly CPF contribution goes to the Medisave account. Third, it is not mandatory to take up MediShield.

Direct provision The Singapore government provides healthcare directly alongside private hospitals through public hospitals that are run as private companies wholly-owned by the Singapore government to increase the supply.

Benefits and limitations Engaging in direct provision to correct the market failure of healthcare in Singapore has its benefits and limitations. Direct provision of healthcare in Singapore does not only increase the supply, but the lower charges at the public hospitals also increase the affordability which helps address the market failure of income inequity. However, public hospitals do not need to consider factors such as profitability and survival and hence are more likely to be x-inefficient and hence productively inefficient than private hospitals. Running public hospitals in Singapore as private hospitals will only alleviate the problem to some extent.

as private hospitals will only alleviate the problem to some extent. © 2011 Economics Cafe All
as private hospitals will only alleviate the problem to some extent. © 2011 Economics Cafe All

© 2011 Economics Cafe All rights reserved.

Page 12

Written by: Edmund Quek

Written by: Edmund Quek Regulation The Singapore government has passed a regulation that makes childhood immunisation

Regulation The Singapore government has passed a regulation that makes childhood immunisation against certain diseases mandatory to increase the demand for healthcare.

Benefits and limitations Passing regulations to correct the market failure of healthcare in Singapore has its benefits and limitations. Regulations on healthcare are easy to formulate and pass in Singapore due to the absence of a strong opposition party in the parliament. However, the passing of regulations requires the setting up of regulatory bodies to ensure that people comply with the regulations and these enforcement costs can be rather high.

Education The Singapore government uses education such as conducting campaigns and incorporating the values of good health into the school curriculum to increase the awareness of the beneficial effects of good health to increase the demand for healthcare.

Benefits and limitations Using education to correct the market failure of healthcare in Singapore has its benefits and limitations. First, incorporating the values of good health into the school curriculum may help people stay healthy from a young age. Second, unlike using regulation, education on healthcare does not incur enforcement costs. Notwithstanding the benefits, there are several limitations. First, education is not legally binding which means that it is not mandatory for people to respond to it. Second, even if it is effective, its effects will only be realised in the long run and this is especially true for preventive healthcare whose benefits are not immediately obvious.

9 MEASURES TO CORRECT THE MAREKT FAILURE OF TOBACCO IN SINGAPORE

Tobacco is a market failure because it will be over-consumed in the absence of government intervention due to two reasons: negative externalities and imperfect information.

Tax The Singapore government imposes an excise tax on tobacco to reduce the supply. An excise tax is a tax imposed on a specific good. It is a specific tax which is an indirect tax of a certain amount per unit sold. The Singapore government imposes an excise tax of $352 on every 1000 sticks of cigarettes which is equivalent to $7.04 on each packet of cigarettes. An excise tax on tobacco will lead to a rise in the cost of production and hence a fall in the supply. When this happens, the price of tobacco will rise which will lead to a fall in the quantity demanded and this may correct the problem of over-consumption.

demanded and this may correct the problem of over-consumption. © 2011 Economics Cafe All rights reserved.
demanded and this may correct the problem of over-consumption. © 2011 Economics Cafe All rights reserved.

© 2011 Economics Cafe All rights reserved.

Page 13

Written by: Edmund Quek

Written by: Edmund Quek In the above diagram, an excise tax on tobacco leads to a

In the above diagram, an excise tax on tobacco leads to a rise in the MPC curve. If the new MPC curve is MPC’, the new equilibrium output level (Q E ’) will be equal to Q S .

Benefits and limitations Imposing an excise tax on tobacco in Singapore to reduce the supply has its benefits and limitations. First, an excise tax on tobacco allows the government to raise tax revenue which can be used to fund research to prevent or treat tobacco-related diseases. Second, an excise tax on tobacco enables the government to reduce other taxes. If this happens, the costs of dealing with air pollution caused by smoking will be transferred from the public to the smokers which will increase the fairness of how the costs are borne. Third, the price elasticity of demand for tobacco by teenagers is likely to be high due to their limited purchasing power. Therefore, an excise tax on tobacco which will increase the price may substantially reduce the problem of teenage smoking. Notwithstanding the benefits, there are several limitations. First, the external costs of tobacco cannot be known precisely. Therefore, if the excise tax on tobacco imposed by the government is not equal to the marginal external costs, it will not help to achieve the socially efficient output level. Second, an excise tax on tobacco which will increase the price may lead to large differences between the price of tobacco in the country and those in the neighbouring countries. If this encourages people in the country to buy contraband tobacco from the neighbouring countries, the consumption of tobacco may not fall. Third, an excise tax on tobacco expressed as a percentage of income is higher for low income individuals than for high income individuals. Therefore, an excise tax on tobacco worsens income inequity.

Regulation The Singapore government uses regulation to reduce the demand for tobacco. The Singapore government prohibits smoking in certain public places such as shopping malls, food centres, entertainment outlets, schools, bus stops, bus interchanges, public toilets, swimming pools, community centres, stadiums, sheltered walkways, overhead bridges, outdoor hospital compounds, common corridors, void decks and staircases within

hospital compounds, common corridors, void decks and staircases within © 2011 Economics Cafe All rights reserved.
hospital compounds, common corridors, void decks and staircases within © 2011 Economics Cafe All rights reserved.

© 2011 Economics Cafe All rights reserved.

Page 14

Written by: Edmund Quek

Written by: Edmund Quek residential buildings. It also prohibits people under 18 years of age from

residential buildings. It also prohibits people under 18 years of age from buying tobacco, people under 18 years of age from smoking and firms from engaging in tobacco advertising in any form. Further, it has passed a regulation that makes it mandatory for tobacco manufacturers to display graphic health warnings such as pictures of diseased lungs on cigarette packets. All these regulations reduce the demand for tobacco in Singapore. In addition to reducing the demand for tobacco in Singapore, prohibiting smoking in the public places reduces the marginal external costs.

Benefits and limitations Using regulation to reduce the demand for tobacco in Singapore has its benefits and limitations. First, regulations on tobacco are easy to formulate and pass in Singapore due to the absence of a strong opposition party in the parliament. Second, unlike an excise tax on tobacco, regulations on tobacco will not induce people to buy contraband tobacco or worsen income inequity. Notwithstanding the benefits, there are several limitations. First, the passing of regulations requires the setting up of regulatory bodies to ensure that people comply with the regulations and these enforcement costs can be rather high. Second, if prohibiting smoking in certain places leads to an increase in smoking in other places, the demand for tobacco may not fall. Third, if the Singapore government prohibits smoking in increasingly more places, Singapore may become less attractive to smoking tourists and foreign talents which may have an adverse effect on the macroeconomic performance.

Education The Singapore government uses education to reduce the demand for tobacco. The Singapore government conducts campaigns through the Health Promotion Board to increase the awareness of the harmful effects of smoking such as heart disease, stroke, lung cancer and chronic obstructive lung disease. It also conducts campaigns to help people understand that smoking can cause harm to the people around them as passive smoking is just as harmful as smoking. Further, it has incorporated the values of good health into the school curriculum to increase the awareness of the beneficial effects of good health. All these measures reduce the demand for tobacco in Singapore.

Benefits and limitations Using education to reduce the demand for tobacco in Singapore has its benefits and limitations. First, incorporating the values of good health into the school curriculum may prevent young people from getting into the habit of smoking in the first place. Second, unlike using regulation, education on tobacco does not incur enforcement costs. Notwithstanding the benefits, there are several limitations. First, education is not legally binding which means that it is not mandatory for people to respond to it. Second, even if it is effective, its effects will only be realised in the long run and this is especially true for smoking due to its addictive nature.

and this is especially true for smoking due to its addictive nature. © 2011 Economics Cafe
and this is especially true for smoking due to its addictive nature. © 2011 Economics Cafe

© 2011 Economics Cafe All rights reserved.

Page 15

Written by: Edmund Quek

Written by: Edmund Quek 10 MEASURES TO ADDRESS THE MAREKT FAILURE OF INCOME INEQUITY IN SINGAPORE

10 MEASURES TO ADDRESS THE MAREKT FAILURE OF INCOME INEQUITY IN SINGAPORE

Transfer payments The Singapore government gives transfer payments in a way that benefits the poor more to reduce income inequity. Transfer payments are payments made by the government to the recipients not in exchange for any goods or services. Examples of transfer payments given by the Singapore government include the Public Assistance Scheme, the Workfare Income Supplement Scheme, Economic Restructuring Shares and New Singapore Shares. Although high income individuals in Singapore also get transfer payments sometimes, the amounts they receive are smaller than those received by low income individuals, resulting in lower income inequity. However, as some of these payments are one-off, they may not have any significant effect on income inequity. Although the Workfare Income Supplement Scheme makes regular payments to old and low-skilled workers, it does not help the poor who are unemployed. Further, the strict eligibility criteria of the Public Assistance Scheme mean that some poor families do not get the cash grants.

Progressive taxes The Singapore government imposes progressive taxes to reduce income inequity. A progressive tax is a tax that increases more than proportionate with income. Income taxes in Singapore are progressive which leads to lower income inequity. For instance, the marginal tax rate on personal income in Singapore rises with the tax bracket which makes the rich pay a larger proportion of their personal income in tax to the government. The Singapore government also uses a progressive property tax regime with three tiers of tax rates for residential properties granted owner-occupied concession. The annual value of a property in Singapore is the estimated annual rent of the property if it were to be let. The first 6000 dollars of annual value will be exempted from property tax, the next 59000 dollars will be taxed at 4 per cent and the balance above 65000 dollars will be taxed at 6 per cent. Further, the 10 per cent tax rate on non-owner-occupied residential properties and other immovable properties is only applicable to the rich. However, in an attempt to attract foreign direct investments and foreign talents, the Singapore government has been cutting corporate income tax and personal income tax. Further, the progressivity of the property tax in Singapore is rather low.

Education subsidy The Singapore government gives a subsidy to public schools annually for the provision of free or subsidised education to reduce income inequity. The annual subsidy to public schools for the provision of free and subsidised education in Singapore has made education affordable to more poor families which will increase their income earning power resulting in lower income inequity. However, education subsidy is a strain on the government budget and the effect on income inequity takes a long time to be realised.

Edusave Scheme The Singapore government uses the Edusave Scheme to reduce income inequity. The Edusave Scheme was established in 1993 by the Singapore government with the objective to maximise and equalise educational opportunities for all Singaporeans through providing

educational opportunities for all Singaporeans through providing © 2011 Economics Cafe All rights reserved. Page 16
educational opportunities for all Singaporeans through providing © 2011 Economics Cafe All rights reserved. Page 16

© 2011 Economics Cafe All rights reserved.

Page 16

Written by: Edmund Quek

Written by: Edmund Quek students and schools with funds for educational purposes and rewarding students who

students and schools with funds for educational purposes and rewarding students who perform well academically as well as in non-academic areas. Like education subsidy, it has also made education in Singapore affordable to more poor families which will increase their income earning power resulting in lower income inequity.

Compulsory education The Singapore government uses compulsory education to reduce income inequity. Compulsory primary education in Singapore was implemented in 2003 by the Singapore government with the objective to give Singaporean children a common core of knowledge which will provide them with a strong foundation for further education and training to prepare them for a knowledge-based economy. It has made more poor families in Singapore send their children to school which will increase their income earning power resulting in lower income inequity. However, it must be used in conjunction with education subsidy to reduce non-compliance.

Manpower policy The Singapore government uses manpower policy to reduce income inequity. Several funding schemes for training have been set up by the Singapore government to increase the productivity of labour and to reduce unemployment. Examples include Skills Development Fund, Skills Programme for Upgrading and Resilience and Workfare Training Support. Most of the schemes are catered for low-skilled workers which will increase their income earning power resulting in lower income inequity. However, due to the effort that has to be expended on the part of low-skilled workers, such measures may not reduce income inequity significantly.

Affordability of necessities The Singapore government uses measures to increase the affordability of necessities such as housing, education and healthcare. The Singapore government builds housing, schools and hospitals to increase the supply and hence reduce the prices. In addition, these public housing units are sold at subsidised prices, these public schools provide education at subsidised fees and these public hospitals provide healthcare at subsidised charges, all with financial assistance from the Singapore government. Further, special provisions are made for those who cannot afford the subsidised rates for these necessities. For instance, Medifund has been set up to help the very poor who cannot afford the subsidised charges at public hospitals pay for their healthcare, rental housing is provided to the very poor who cannot afford subsidised housing and education is provided free to the children of the very poor who cannot afford the subsidised fees.

Causes of income inequity in Singapore

Globalisation is a cause of income inequity in Singapore. Globalisation refers to the increase in flows of goods, services, investments and labour across international borders. It has led to a more rapid increase in the external demand of the Singapore economy than the domestic demand. As a result, the profits of firms in Singapore that produce goods for export have been rising more rapidly than the profits of the firms that produce goods for the domestic market causing the income inequity to worsen. Further, the wages of high-skilled

the income inequity to worsen. Further, the wages of high-skilled © 2011 Economics Cafe All rights
the income inequity to worsen. Further, the wages of high-skilled © 2011 Economics Cafe All rights

© 2011 Economics Cafe All rights reserved.

Page 17

Written by: Edmund Quek

Written by: Edmund Quek workers in Singapore have been rising more rapidly than the wages of

workers in Singapore have been rising more rapidly than the wages of the low-skilled workers due to the more rapid expansion of the export industries that produces high value-added goods and the more rapid decline in the low value-added industries and this has also caused the income inequity to worsen.

Shift from income taxes to goods and services tax A shift from income taxes to goods and services tax is a cause of income inequity in Singapore. Income taxes in Singapore are progressive and the goods and services tax is regressive. The Singapore government has been cutting corporate income tax and personal income tax to attract foreign direct investments and foreign talents. In order to avoid a budget deficit, it has been raising goods and services tax. This change in tax policy has caused income inequity in Singapore to worsen.

in tax policy has caused income inequity in Singapore to worsen. © 2011 Economics Cafe All
in tax policy has caused income inequity in Singapore to worsen. © 2011 Economics Cafe All

© 2011 Economics Cafe All rights reserved.

Page 18