Explain why pollution and
congestion caused by cars are
likely to cause market failure. [12]
Explain why pollution and congestion
caused by cars are likely to cause market
failure. [12]
Explain: to illustrate with examples
Pollution and congestion caused by cars
Market Failure: What are the reasons for
market failure in this case?
What leads to market failure?
Scarcity
Resources need to be allocated efficiently
Economic efficiency
MSB = MSC
• Define market failure
• Define negative externality
• Explain what are the harmful effects of
driving cars on third parties
– Emission of greenhouse gases which can
threaten the health and respiratory conditions
of people who did not drive the car/ contribute
to global warming
• Explain what are the harmful effects of
congestion on third parties
– Increase journey time for other users of the
road
• Decrease in productivity
• Late for appointment
• Increase in wear and tear
• Henceforth, there is a divergence between
MPC and MSC
Assuming there is no positive externality, MPB = MSB
Costs/ Benefits In an unregulated market, MPB = MPC
MSC
MPC
MPB = MSB
Qm Qty of car usage
Socially optimal level of output: MSB = MSC
Costs/ Benefits
MSC
MPC
MPB = MSB
Qs Qty of car usage
• Benefits
Costs/ Qm > Qs
• Over-production/ over-consumption
MSC
MPC
• Misallocation of resources
• Welfare loss
• Market fails!
• Need for government intervention to attain the
efficient allocation of resources
MPB = MSB
Qs Qm Qty of car usage
Discuss whether the Singapore
government currently adopts
appropriate policies to overcome
this market failure. [13]
• Discuss: Provides both the benefits and
the limitations of the policies
• Singapore government
• Appropriate policies: Evaluation
• Market Failure: Overcome congestion
Policies
Manage Car
Manage Car Usage Others
Ownership
Policies to control Car Ownership
• Additional Registration Fee (ARF)
– Upfront tax based on a percentage of the
Open Market Value (OMV) of the car
– OMV takes into account purchase price,
freight, insurance and all other charges from
the manufacture to the delivery of the car
– Limitation: people buy smaller cars with lower
OMV rather than give up buying cars
altogether
Policies to control Car Ownership
• Vehicle Quota System (COE)
– Number of cars deregistered over the past 6
months
– Vehicle growth at 1.5% each year
– Allows the vehicle to be used for 10 years
– Issued by the government through
competitive bidding
– Prices set by the lowest bid
Price
S1
S0
P1
P0
D0
Qs Qm Qty of cars
Policies to control Car Ownership
• Vehicle Quota System (COE)
– Limitations:
• Difficult to determine the optimal number of cars
that should be on the roads
• Congestion is due to car usage, not the mere
possession of the cars
• Cannot manage localised congestion unless car
ownership is curbed to a very large extent
• Once a car is bought, it is used very intensively as
owners tend to drive as much as they can
Policies to manage Car Usage
• Congestion charging is the most direct
way of tackling congestion as it targets car
usage.
• Congestion charges work by requiring the
motorists to take into account the cost of
congestion borne by others as a result of
their driving.
Policies to manage Car Usage
• Electronic Road Pricing (ERP)
– A congestion charge is deducted
electronically whenever a vehicle uses a
priced road.
– Charges vary by time and location, based on
traffic speeds on the road
– Through regular reviews, ERP charges are
adjusted upwards or downwards to keep
traffic flowing smoothly while not underutilizing
the roads
Costs/ Benefits
MSC
MPC
MEC
MPB = MSB
Qs Qm Qty of car usage
ERP increases the private marginal cost of car usage
Costs/by internalizing the external cost, thereby reducing the
Benefits
level of car usage to the efficient level of output
MSC = MPC
MPB = MSB
Qs Qty of car usage
Policies to manage Car Usage
• Electronic Road Pricing (ERP)
– Limitations
• To determine MEC so as not to overcharge or
undercharge is difficult to achieve in real life
Why have such a complex menu of
policy measures?
• High car ownership taxes is an indirect but
practical way to price the negative externalities
of private car use
– Taxation would have to be very severe to achieve any
success in curbing car ownership and this would be
politically adverse
– Hence VQS to be implemented to ensure that vehicle
growth will not exceed the allowable cap and allow
market forces to determine the price of the permit
Why have such a complex menu of
policy measures?
• Usage pricing would be more efficient and effective in
moderating car usage.
• Congestion could be dealt with in a targeted and
responsive manner
• Nevertheless, vehicle ownership taxes continue to have
a role in managing car demand
– The psychology of paying one-time lump sum upfront is different
from that of paying each time one crosses an ERP gantry
Conclusion
• To ensure that people deviate away from private
transport, there is a need to ensure a world class
public transport system
• Public transport operators are regulated by the
LTA and PTC
• Regulations cover service standards (coverage,
frequency, reliability and comfort) as well as
fares.
