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
Costs/ Benefits
Qty of car usage
MSC
MPC
Qm
MPB = MSB
Assuming there is no positive externality, MPB = MSB
In an unregulated market, MPB = MPC
Costs/ Benefits
Qty of car usage
MSC
MPC
Qs
MPB = MSB
Socially optimal level of output: MSB = MSC
Costs/ Benefits
Qty of car usage
MSC
MPC
Qs
MPB = MSB
• Qm > Qs
• Over-production/ over-consumption
• Misallocation of resources
• Welfare loss
• Market fails!
• Need for government intervention to attain the efficient allocation of resources
Qm
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 CarOwnership
Manage Car Usage Others
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
QmQs
S0
S1
D0
Price
Qty of cars
P0
P1
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
Qty of car usage
MSC
MPC
Qs
MPB = MSB
Qm
MEC
Costs/ Benefits
Qty of car usage
MSC = MPC
Qs
MPB = MSB
ERP increases the private marginal cost of car usage by internalizing the external cost, thereby reducing the level of car usage to the efficient level of output
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.