Question 3: TYS 2005 Q4

(a) Explain why pollution and congestion caused

by cars are likely to cause market failure.
[10]

(b)

Discuss whether the Singapore government

currently adopts appropriate policies to
overcome
this market failure.
[15]

Market Analysis MF
1.Use of Demand and
Supply
2.Supply => Cost
Curves (Producers)
3.But in Driving Consumers' as
producers
5.ERP - Road Usage,
tax on producers?
consumers?

5.PMC drivers and

not producer
perspective
6.X-axis - distance
travelled, nos of km
travelled, nos of
hours travelled, nos
of cars owned
7.Note : Analysis
from Cost Benefit
perspective
instead of market
analysis (DD & SS)

Examiner's report TYS:

N2005
Q4

A common response, and one that could have

been improved, was to set the diagrams within
the context of the production of cars rather than
the use of cars.
An improvement would have been achieved if
the horizontal axis on the diagram had taken
account of this distinction i.e. through use of
quantity of miles driven or the number of cars
owned rather than number of cars produced.
Pollution was thus presented as the result of the
manufacture of cars rather than the use of cars,
although all policies later presented in the Singapore
case referred to pollution (and congestion) caused by
the use of cars.

Diagram

(a)
by

Explain why pollution and congestion caused

cars are likely to cause market failure.
[10]

INTRODUCTION Use KIA

Key word: Market Failure.
Issue: Identify driving will result in negative externality
pollution and congestion.
Approach: This essay aims to.
BODY Use SEED
Define negative externality.
Define and give examples of PMC, PMB and EMC of driving.
Explain how market fails and leads to over-usage of
road/driving with the help of a diagram.
CONCLUSION

Question 3: TYS 2005 Q4

(a) Explain why pollution and congestion caused
by cars are likely to cause market failure.
[10]

(b)

Discuss whether the Singapore government

currently adopts appropriate policies to
overcome
this market failure.
[15]

Task 1(Worksheet)
various policies undertaken by the Spore Govt
1.ARF
2.VQS/ COE
3.ERP
4.Public Tspt

Introduction
Currently the government has adopted various
policies to reduce congestion and pollution by
reducing car usage, ownership and provision of an
efficient public transport system.
The ultimate goal of implementing these policies
is to effectively reduce the number of car trips
taken at any point of time, to the socially optimal
level.

Body 1 (ERP)
Main Solution 1 (Electronic Road Pricing - ERP):
1.For Singapore, the road congestion tax imposed is known as the
Electronic Road Pricing (ERP) where gantries are placed on
roads to deduct fees on motorists using the highways leading to
the Central Business District.
2.If ERP Price= EMC.
3.ERP rates are adjusted to take into account different road traffic
conditions at different spots and at different times of the day.
4.Rates are highest during peak periods on busy roads where road
congestion is most likely to occur.
5.The system allows different areas to have different rates
depending on the level and time of congestion. Hence the method
is more equitable because it deters those who do not need to
enter the CBD during the hike of the peak period from entering.
Hence, those who enter during the hike of the peak will pay the
highest ERP charges as they will be the ones who are both
willing and able to pay those charges. In this way, this method
spreads out the volume of traffic across different hours of the day
thus avoiding heavy concentration of traffic at peak or rush hours.

Diagram
The government might impose an
tax on drivers corresponding to the
external marginal cost i.e.
Tax=EMC at QS (distance BD) on
each unit of output. This shifts the
PMC upwards so that the new PMC,
which equals PMC + tax, coincides
with the SMC at QS.
Hence, the new market equilibrium
quantity where PMB = PMC + tax,
now coincides with the socially
efficient quantity QS, where SMB =
SMC.
Referring to Figure, the government
make car users to pay a fee (a
congestion tax on each unit of
output), the amount of the tax
corresponding to the external
marginal cost (i.e. third-party costs)
of CD at QSE. This shifts the PMC
upwards so that the new private
marginal cost, PMC1 now coincides
with SMC since PMC1 = PMC + tax.

The imposition of the tax equals

to the EMC resulting in a no. of
car journeys that corresponds to
the socially efficient level of
output, QSE where SMB=SMC.
The tax is seen as payment for
the congestion or third-party
costs designed to get drivers to
"internalize the externality" by
considering the external costs of
driving and serves as incentives
to reduce the usage of cars.

Limitations (ERP)
LACK OF INFORMATION:

Is it easy to obtain information

of the actual cost of reducing
congestion along Orchard
during peak hours to work out
the ERP rate?
The government may not
possess all the information
needed to be able to estimate
the correct amount of tax to
impose.
An overvalued ERP may
reduce the optimal use of the
road, while an undervalued
ERP may not reduce traffic
congestion by much.

LOOPHOLES:

ERP on some roads may

simply have the effect of
diverting traffic, and hence
congestion, to roads where
there are no ERPs.

Body 2 (COE)
Main Solution 2 (Certificate of Entitlement - COE):
In theory, this is a quota system to restrict car ownership
used in Singapore. Officially called the VQS (vehicle
quota system), it requires a car buyer to purchase a
Certificate of Entitlement (COE) for the purchase of new
vehicles. The supply of COE is strictly
regulated/rationed by the government while the price of
COE is subject to bidding, hence it is determined by
market forces.
Thus, to effectively control car ownership, the
government will be reducing the number of COE for
bidding over time so as to increase the price of COEs in
order to deter car ownership.

Limitations (COE)
LACK OF
INFORMATION:
Government may
estimate the number of
COEs wrongly. There were
times that the price
dropped to $1 when many
cars were scrapped and
the number of COEs in
the open market
increased tremendously.
BLUNT INSTRUMENT : it
affects those who are not
within the targeted group

NEGATIVE
IMPLICATION:
However, reducing COEs
may have unintended
consequences as it
might leads to more
intensive use of cars on
the road
Furthermore, the high
prices of COE can be a
cause of rising living
cost in Singapore since
expenditure on transport
is a main component in
the Consumer Price
Index.

Body 3 (Pollution)
Regulation/ Legislation
Mandatory installation of
catalytic converter in cars;
car scrapping and annual
inspection: ensuring car
exhaust emission from all
vehicles in use meet the
limits set by Ministry of
Environment; banning of
leaded petrol to reduce
sulphur content diesel fuel;
introducing tax incentives
to narrow the price gap
between electric/hybrid
vehicles and conventional
ones.

Limitations
Compliance
Admin Cost

Body 4 (Longer Term

Solution)
Solution 3 (provide good
substitutes to driving)
The use of substitutes such as
public transport is widely
encouraged to divert the
private motorist away from
using their cars. In Singapore,
the affordable, extensive and
efficient transport network such
as existing and new MRT lines
and buses would encourage
some private motorists to give
up driving cars.

Limitation

Limitation: Public transport is

not so effective for many
Singaporeans who are getting
richer and more statusconscious. Cars are positional
goods which people aspire to
possess once they become
successful. Thus, no matter
how efficient public transport
maybe, it cannot completely
replaced/substitute for car
ownership. This is an issue the
government needs to carefully
manage in an affluent country
like Singapore.

Evaluation
Comparing ERP and COE):

Reducing car ownership

vs Reducing Car Usage

Both not really long

term solutions
- VS Better Public
Transport.

Overcoming limitations of public

tspt

Bus Lanes
Increasing
frequency and no
of buses/ bus
routes

Conclusion
At present, the issue of traffic congestion is adequately managed by
a combination of restrictions on car ownership and usage, matched
with an efficient public transportation while pollution is kept under
control by various regulations.
However, in the long run, with Singapores population increasing and
not matched by an increase in land space, it would be almost
impossible to increase the number of private vehicles. Thus the only
viable solution in the future would be to get most of Singapore
households to rely on public transport. Towards this end the
government has already stepped up construction of MRT lines to link
up various parts of the island so to provide a comprehensive rail
network to offer a good alternative to private car ownership.