-

Although efficient at producing some good such as food and clothing, the free. market system failed to produce effectively things like street cleaning and education. a) Distinguish among private goods, public goods and merit goods and explain into which category street cleaning and education should be classified. (12) b) In the light of the statement above, evaluate how government intervention can help bring about a more efficient allocation of resoUrces. (13)

GeneralPlan Part(a) . Distindion between the threetypesof goodsby cfraracteristics, withexamples,and provides govemment it. whetterthe . Justfr the classification goodand education of street cleaningas a public as a merit good. Part(b) r ConskJer waysof govemment intervention. the possible . Evaluate whether resources areefficiently allocated in eachway of intervention. Part(a) Private aoods Excludable; Nature I characteristics Rivalin consumption Examples Govemrnent provision Petroland most goods consumer Notrequired.The market mechanism can provitle allsuchgoods Merit goods Theyare private goodsdeemedto be desirableby the state Edu'cation, basic healthcare, sports facilities Required.Themarket Notrequired.The mechanism willnot marketmechanism provide allsuchgoods can provideall such goodsbut not. enoughis producedNon-excludable; Non-rivalin consumotion Streetlighting, national defence, law& ordel
Publicqoods

Street Gbaning . Tecfrnically lkely to be a publicaood. . Non-excludable:Streets are publicareas and it is difficultto extract payment from users. Free dJer problemexists. . Government interventionis requiredto maintainpubliccleanlinessand hygiene. . Nonriualryr:there is no extra cost in supplyingsuch servicesto an additional consumer. . . Meritgood characteristics:streetcleaninggeneratesextemal benefitson the as it improvesthe health of the community. environment in the absenceof govemment provision at Thusthe good is likelyto be under-consumed zero price-

Education . A clear case of a merit good. job. Prirrate benefitsare the higherpay and more satisfying growth as a result of a more educated . Externatbenelitsinctude the faster economic popubtion. Tendsto be under-consumed and under-provided.

+8

resource reverof optimum a socia*y achieve to inte'entionis required . Government in consumption' is present and rivalry Jtcation' ' -^od as it is excludable go . lt is a Private the goods can produce t":* free if the is not required intervention :"rt:l"*ment Inr oovernment . 6ou"tnment ir help definitely . Publicgoodg.t

:'ft ':u*-ildd,rJtrnrg'"u
.

to used be arso *n . f,gis"tior

level'

suostul in the ih" amountol allocation in resource Evalu-aliont ."1^^^^*,e eJficiencY effit calculate. r^^ rrarre,ed to atain economic

*Jr,i:3ffi1?'[i?:;3;1;ilfJiftl,';," :t#+U*tg,t'*""t?"r""H'gi,t"":ft?:?:?_=:*:,":'#div

.iuuru.ti",Ti,ff ;'e1"n:'J$,lif,$i3:i':X*$"J;;"ttained' sociallyof

t
fl
4q

(a) Explainthe sourcesof marketfailure'

(12m)

(b) Discussthe needfor governmentinterventionin such situations.(13m) GeneralPlan (a) 1. Definemarketfailurethe variousformsof marketfailurc' 2. Explain

(b) 1. Explainthe variousformsof govemmentintervention' of such measures' the desirability 2. Evaluate 3. Conclusion
(a) 1. ' Definemarketfailure. the'righf quantity of DD and SS failsto produce A situationin whichthe marketforces neither allocatively is therefore anJ chargethe'righf price. The marketoutcome efficienl efficientnor productively failure' formsof market 2. - Explainthe various make it and non-rivalry of non-exclusion ( goods characteristic of public - nL piouision a good to charge Unable service. or produce the to foi privaiesector not-prontaOle price). extemalbenefits) of meritgoods ( marketdoes not consider provision - inaO6quate extemalcost) goods ( marketdoes not consider of demerit - ou"r proOuction Monopolies and Oligopolies of existence the to due - marflt imperfections doesnot take placeat the point why production Explaineachof the aboveandindicate where SMC= SMB. whererelevant' withdiagrams lllustrate
(b) formsof goveqmentinteryention' 1. Explainthe various

of publicandmeritgoods I - Oirectprovision - Subsidies - Taxation - Bans I oligopolies of monopolies - regutation

I; Explainhowitworks. and Give examples Illustratewith diagrams

of suchmeasures' the desirability 2. Evatuate e'g' of the measures the effectiveness Evaluate (difficu|tiesindeterminingthetax,subsidiesorfines) - lack of information -nignadministrativecostandc|osesupervlsionneeded - ldPholes in monitoring the measures - time factorand costof implementing 3. Conclusion the costand thereis stilla needto assess is needed intervention govemment Although is necessary the intervention whether deciding before intervention oi govemment benefiis or not.

l
I
5o

ol peoplehave chroric 10o/o Right no* 5 miltionpeople in china havetuberculosis, epidemicsare simnlv silent such hepatitisB. Dueto lick of resourcesand attention, ignored.'

of scar allocation anoptimal ensure of Gh-ina the governmelt Ei ilffir'"lilii ""n services? in tne frovistn of health resources
GeneralPlan

-?:,"j:*:1::-::,:'::"^:l:1[?1t3"?::'

Parta. it resources. to allocate to marketmechanism ffcnn" andthe shiftof emphasis failure 2. Meaningof market marketimperfec{im' rrarlous typesof marketfailures:extemality, reRects ;: 3i6i6ioemics, and incomeinequalitYof privateand socid lncludean explanation 4. Explainne,gxemai-bsts of suchepidemics. and Incomeinequality co5{a; Marketimperfections 5. Conclusion Part b efficiencies and productive ffiefinition of optimalallocationof rcsources: atlocative intervention' Z. -- fne needfor govemment to marketfailures with respect Discuss with the implementation. associated and probrems measurcs 3. short temrgovemment measures of these and evaluation 4. Longtermmeasures 5. Conclusion

Parta. to ailocate it resources. 1. china and the shift of emphasisto martet mechanism its scarceresources to ailocate price mechanism op"n. ti nowailows china is nown.,or" in someareas. is in total ago whenthe govemment decades economy to the command This is a contrast ."ont,olofeverythinge.g.inbankirg,manrrfacturingandhea|thcare. to free marketis in stageswhich economy fromthe command tnismove"meit However, As a resuntherestit existsa lot of meansgou"*.n"nlr,", notn rry go of at contrors. '"t and redtaPe' bureaucrary 2. Meaningof marketfailure leadsto too few or too many marketeconomy unrestrained in wnicn-an A situation the pricesystem activity.Marketfailuresprevent economic goingto a specific resources fromattainingeconomicefiiciencyaswe||asothersocia|goa|s. SMC= SMC up to the pointwhere are notallocated Resources suchas existence fairures of market sources the various reflect 3, .These silent epidemics inequality and information of External*ti, t"ti"t i*p"tr".tions, imperfect

5i

4. ffiernality, market impertectionsand income inequality of suchePidemics' o Extemalcosts costof death the medicalcost, costof discomfort, Privatecostsinclude in getting community the rest the by ExternalcostsinCuoethe cost incuned 9f who catchsuch ones loved their lose anJ n"p B, the cost of griefwhenthey tuberculosis the costof burial. illnesses, = private cost+ extemalcost Socialcost care When market of he.alth the extemalbenefits is to o<plain approach - An altemative supplied,hence care preventive health prvrg=Fluc, itwould r6su[ in too little "qdt", occur. suchePidemics shouldbe included Diagnams o MarketimPerfections thoughthe marketis openingup wherebymultinational - ln the meoicalneld, is stillveryhigh. are settingunjn Clina, the medicalcost pna*ir"rti*i*rp"ni6s at a few billion$ with import intoChinastrands The cunent*ottn of irported equipment joinedtheWTO in 2001' to 30% beforeChina tax at 4 - }o/o,compare as their aim. The yth profitmaximizing operatelike oligopoly and hospitrats The doc{ors be highfor could the priceof medicaltreatment demandis nighlyinel.rti" "iro'nence : the Patients. lie largelyin the handsof the of the patientsmeansdecisions information - The imperfect for priceand-demand the raise power may and doctors. oodors navemonopoly and unlicensed are there additircn, tf,at may not Odaipiopriate. In medicaltests in the rurd breaswho chargethe poorfarmershigh prices. practitioners unqualified a lot of peoplecannotaffordto market, in this imperfect - oring to the highmedicalcosts is seenas a marketfailure. be t6ated, nericethis epidemic . Income inequalitY livingin the city and ruralareas, between - O*lng to the riO" in*re disparity Peqql" than ruralfarmers' Kin the treaEnent dwellersare moreabieto affordmedical in their "rtv areas,p"opi* haveno insumnce, andmedicalcostshave risenfasterthan rural i untreated. people remain T0omillion in@me,hencet'hese 5. Conclusion doesnot intervene.More resources to existif govemment wi[ continue Marketfailures medicine, supplyin termsof stiaff, to increase to the medicalfietd shouldbe ailocated etc. medicalequiPment

5:

wr

r.orn

efncbracs : atocativeand productiue of resources on of optimararocation

2.|n(a),wehaveseenthedifferentfgp"ofmarketfai|ure.ThismeansthattEfets

ffi f ba TJL?lKffi ficient.,,oooo?!i'1"il1"'''"oif:"y*::::iylff respeci inef with iitiit"n"rfon. Discuss

il"#;i"J;H#?J'#;-;;;' extemalitY'
e'g' r5*a failure

r'strortffi

;;ff;"r for hearth demand output' be PJi:Es of raising level ..-L6 rarirr +r leadto unethical doctors Willthis enough? is much how However hale financialhelp? sincetheyknowtn"iit" p"il"nt: thesubsidies? inJllt"io to nnance Willgovemment to be nm canlorg thehospitals imperfect,.govemment less market the make about - To n{:lg be-transparent tre cdd e'g' not'p-iialt lp"ttiJt5' tneir in lesistfi' throush transparent rnf gne done ttJ*:"

benentexist),totlegt'."1',9.'PJ'{Yl**:*:t*lm;f -'ss ;ll'J""1i"ff:ttii;;i:!,i!m;6"*illrll""tsuchdiseasesab '#'.ffi H:i*:?f to theso&ty olfr *'r incre-as!. wit increase

Sfi:trffij?:jfi'r"?sovemmentcansive.outmoresubsid'es-(rvtr

tn"oo"toi[ii':iii;;;i-"f medicine, ar"

thesed#; However, tont'ott

and enforce' to monitor

"xp"nsive

tostav ,f;""1#fff"X[t":?5#:H;iffi;;s;1nat responsibiritv fr'm":::g:"j,ff Ti'X13lj.;:ffi,ff ''"i::;HlffiffiJTf isasociar 1l""jlff

-rn-"iJition, the funds to finance such progralr procest. long u"rv is This healthy. " may be costly. measures to take effects. long term mt ^^-i^'o rnr the tano for rha serious too be may These epidemics

ins spread from q=e disease^q ston : R #":H$"1?;"ove.va ccinel _tg for everyone' cheapenough
uut.in"" *hi"h - Produce "t" Theprob|emwil|a|sobetheamountoffundsneededandtimetaken.
5, Conclusion to solve these anr{ lnno t term measures long term ^L^?r ram ^L short term and both adopt to has Government in China' welfareof the peopte to improvJt#;ffiic epidemics

in recentyears channelingan increaseamountof resC government ft. Singapore as research and development in its effort to crrrt well as towardJ education
knowledge-basedeconomy. a. Distinguish between a private good, a merit good and d'public good and underwhich of these classifications the following should be placed: education (i)

b.

(iil researchand develoPment Il4 biscuss whether, according to economic analysis, govemment interventio
lead to a more efficient use of resources [l

GeneralPlan: a) ldenffi the differencesbetweenprivate,merit and public good. Development 1. Pivate Good / *cludable Rivalrous Left to private Producers 2. Meit Good Rivatrous/ Excludable A privategood that generatespositiveextemalities.Output (Qe) is less than socially optimum(Qs) Diagram:SMB>SMC

Price

Diagram: Allocation of resources when extemal present benefits are

Qe

Qs

output

i. Education - those who do not pay fees/meetthe grades ' Excludable . Generatepositiveextemalities . Secondary/primaryltertiary education . Highereducation- privategood features more prevalent ii. R& D - Knowledgeftom R & D does not reducethe amount of knowledgethat can ' Non-rivalry be usedbYanotherfirm. - possibilityof chargingwith patentrights issued ' Excludable justifyinggovemmentsubsidization of R & D spending ' Generatepositiveextematities . A meritgood as privatesector has little incentiveto developnew technologyon the s* edge. desiredby the govemmentto give the countrya competitive

5s

3. PublicGood Non-rivalry nnarr ri problem free rider ---r..^^ *ha - i.iln**"roo"ut" -frce the good o produce is willing producer No private b) GeneralPlan: -Efficiency - i"tt"A"Ai"n: Explain MarketFailures resour@s Condusion

=sMc&sMB pMC &PMB r behavior; parero grigt optimaritybetteroffwithoutmaking H|fftfi$:g! anyone it ''l'ii-#t"io':,:
llF An a$ocationwhereby ,#;;;;;;;ff'l:"'thatsocialefficiencvismaximized'

MarketFailure: hperfedioninthemarketsystemnecessitatesgovemmentintervention'Astateinwhichthe eficienfly' markeidtes not;e resouroes as discussed: fuf"*"t Failures Goods Public of ' Absence beingignored , fr*"fifes . a_too aamnorir. ^^^ *..^h muchcompetition . wasbg*;;;;-pl''Au*.0u" 1" of consumers m";;;tieaoing to explcftation ' Rise"f inequalitY ' lncome and unemployment ' Priceinsatrility

:""#*Sffi:hgn #;i"";il; improvethe

io#

by taxinghigher-income transfers to ;i*tr income attempt ;;;;;"is Distributirret incomeindividualsin the lowei gmnts to d;;-;;king incorne (progressive individuats
ott*rrire"paymentsl.

to roles resulatory and stabilization distributive, t^o;rtncative, rerep ofresources' allocation r"** determined

(deme goods) and (demerit .--*^- ^{ aama arw'lq services gq!" an, andservi@s of some plohibitth:-P11|u"Uon Help imports control Regulatory: working Regulate lo-'-'' ooO!;i,;A*tioi' ot mgrtt-S. -1",^;;ducive promote of activities' conduct forproper pJ#'f#;;ri positive -*ilption andseta andencourage "f uvt"*"q9nol reoulation more to obtain Allocative: of markets *g-,il"tinsttrestructure "ffi;;;;'*riti"" failsand market extemalitiesfiil;d,'rrt., "n6 priiildit where merit soods Jiiffif,inro" ""d comperirive

g:;:n'f,tru*if

Mayatso suppffi" "d;;i;."ti:*lPa.r mayalsoaoopt Govemment

policies' ftscar and monetay ado{ of an economy leoppriate stabilitv extemal *licies to.achieve
supply' poriti"t to alterthelevelof aggregate

s6

of resources: theailocation mayworsen measures andhowgovemment probrems of intervention

o a a

maybe conflicting of Govemment Objectives rider Problem Resultin ftee the accurately to forgcast arisefromtheinabili.ty bnort"g"r andsurpluses or in ov.erestimation results knowledge of thetuture.lmperfect ;;;; of resources whichmayleadto misallocation of ftrturedemand scar@ for is competing goodi andservices; "nlo"rtiration in providing puuric sector, ine there is undertaken, is analysis Evenif costandbenefit i".""r*r available. of valuingall costsandbenefits' difficulty of profitmotivemayleadto wasteof resources' Absence

Gonclusion of the industries characteristics dependson the peculiar Extentof stateintervention policy makers. by attitudeadopted concemeoandthe patemalistic maybe at the expenseof allocation resource efficiencyof and occur failuremay Govemment othergoals.

5T

disc$ssthe extent to n differ andt" tn-"["-privateand social benefits ""ffi0"' which it is possibt;;;JJesirable Plan General of resources.Explain Exp|aintheconceptofpositive.gxtea{itiesandextema|benefitsandhowtheproductionof positive."f;;t'"s-resurts in misatocation giu"r'ri-;Jio qood which and sociarbenefits' prirmte a gap Uetween t" ,J;;;-th" that;;;;Loopreo th6 measures andsu@essof the measures' b'Jrn'ii"'ii." tte desiiability answer Suqqested who is consumingthe lntroduction accrueto the indMduar of privatebenefit: benefitsthat . Definition of a accruesto societyfrom the consumption of sociarbenefit: benefitsthat : [ffi,;"; the oood' there are extemal benefits arise from when differ benefits social , Frivate and sood ot a Particular ;;;ftion
*

DeveloPment are Extemalbenefits of extemalbenefits' . Definition UytnitOP91|!*twho are neither tn"t benefits Theygive "t""'Uolrrl n*ii" *niumerbf the good' the producet pilg+ EMgi s 9r4g > benefit result'social riseto extemall"""ntt' As a benefit' Private : SMB> PMB) o$t with.diag^ram anoexplain (lllustrate servtces and education health E.J. "t" give rise to |arge and healthservices |ike education Goods : goods merit of externa'ties positive Definition mentgoods.Theseare goodswith extemarbenefits process' political "no-#'*iled ouiitlurt ioi Ln""ption by the that are deemed of resourcesand therewill be under-allocation differ, benefits social and where private good' unO"t*intumPtionof the the free market Wherethereare extemalbeneftts' as the efficiently. resources willfailto allocate the accorrnt benefits free marketwill nottuf" into

market Free parties' iiJ li"'li"i"ved bvthird = PMC andthis

*htt"'PMB occurs equilibrium and of resources under-ailocation ;il;;iii; of aid the with ffirJrl-;;tio to"i"tv' (rxptain
diagram)
I

g}|g3

?Mb+E r4g

ory

Measurestoreducesapbetwe-en,.p.:Y::"3T::::'3fiJ"J:1

j""S:"Ji:[:ffi;lJ '#ffi:iliii{}f^111'"ffi $i;::ffiJlf :lffii: 'ffi IJ:^:J1ffiff#;i'tii"-"Ln'"umernuvs"n*d,::;I'cewhic :;.t"'Hff ;,lssJff to gi""t*t" Positive "ffisu!s1!Y ffiilffi i;;; :Ii"j,i3l'l3l: .P9' -'it Yl"l:
L f i J v (tr r r r r r e ' t' it' - - rcgs " in expener ;;*tltequallo the EMEthat at

that level of outPut'

ffir':;;;;;

"nil will increaseto the lncreasedemano't'tuanlity level' oPtimal sociallY

will to.consumers = PPsgiven

sg

7r
i:-:-

optimal the socially to ensure schoors in government education subsidises Government outputis Produced' : costs. Evaluation i and administrative , !_ aacrrr. of hiringcivil servants cost ^r of ^^n^ terms in society on cost rncurs of extemalbenefiL Difficultto determin"'tn""""4 value of sociallydesirable ggods'' more ;;;;t" p"opt"io Encourages are large'th-"-' lf the po'iW" extemalities ,/ Governmentfinancing ald production so piodudionfacilities that therewill be fi*it"..tnJ *d;;;i" govemment "OJitionat to the diagram'the govemment J""i pt o'*d' With reference in orderto achievethe sociallv the right and b;td;oQi "toun{oi",il pJ]i""ir[-rnortr"[ may need,o for inoculation centres 'Qf coutJn'nO andoperate ootimallevelof output.Gonemment diseases' againstcontagious : Evaluation costs' !s and administrative of hiringcivil servant ^f aacr cost r of ^---^ terms in society on cost lncurs tLegis|ation-Theqo*ml:nlmayrequire.b.y.l"'"lllt"certainactionbeundertakenby arerequiredby lawto be inoculated in the sodety.E.g.scnir-"'g" children individuals Priorto schoolentrance' the rawis osrs in ensuring and administrative officers of terms in requireo F::H*: followed' goods' 'num quantity desirable of socially a mlnlr to consume Forces@nsumers of the good the consumption to promote / Moral Suasion- publiccampaigns Evaluation: to runthe camPagn GostlY yielddesiredresults' may-not As stricflyvoluntary,
I

i'
I' i
i

I I

Conclusion of the measures and success on the desirability . Comment maybe greaterthan the in" mst of intervention benefits / where the extemal betterfor the rt is therefore "r"rr, "r" th"li.i"rrv Lptir"r rever. consuring from deriveJ benefit notto intervene govemment /|nmanycasesthevalueofextema|benefitisdfficu|ttomeasureparticular|ywheretime extemalities of the negative rn"""urateestimation saving,life savingmaybeinvoruJ mayresu|tingovemmentfai|ure-f"i|,'"ofthegovemmenttoallocateresources efficientlY'

s9

(8) a) bistinguish between private and social cost..Social with can only be achieved resources of optimality in the allocation b) (17) crovernmentintervention." Discuss.

Plan a) Explainpte and socialcostswith examples' them Distinguish Explainsocialoptimalisin resource-atlocation b) ' with govemment'intervention is achieved Explainhow socialoptimality failure? ls theregovemment answer Suqqested = costincunedby the byvel or sellerof the good cost ffie = cost of production e.g. raw materialcosts, rent, bome by producers, ne cost of producer wage = prsonal a good cost of consuming pticost of consumptlqn of pteand extemalcosts. costto society.lt comprises Socialcostis the totral (i.e. buyeror sellerof the good).The third party not the Extemalcost is the cost to a third for the cost. partyis not compensated living around the a cost to residents imposes pollutes the environment thai E.g.'n firm and asthmapatientswill need coulddeteriorate of the residents i"Etor'. The healtirstandard to visittheir doctorsmoreoftenDifferences of extemalcost, social cost > pte - pte cost is part of socialcost-With the existence if extemalcost does not exist,socialcost= pte coSt. cost.However, for by the free marketforces.Externalcost, a part of social - pte cost is accounted by free marketforces' cost,will notbe accounted occurswhen of resources allocation optimum b) Socially = Cost Social SocialBenefit Marginal [aargihal of the good to of resources the production - no under-or over-allocation for society of ouput produced rightquantity maximized is welfare communitY where MR equilibrium marketachieves competitive exist,a perfectly Whereno extemalities is attiained. allocation resource = MCand P=MC.Sociatly optimum perfecily competitivemarketswill either under- or over-producethe with extemalities, output. by the free market. Explain with a tt-extemal cost exists,there will be over-production diagram. by the governmentto achieve iirir"in the conectivemeasuresthat can be undertaken + evaluation' allocation resource efficient by the free market. Explainwith a exists,therewill be under-production if extemalbenefrt by the govt' + evaluation thatcanbe undertaken measures thecorrective Oirgr;. gxplain the benefits. exceeds whenthe costof govtintervention Govtfailureresults Evaluation: govt intervention is minor,thereis no needfor Wn"i" the extemality of tax imposedor on the exactamount to decide perfect knowledge hlve not i'n" g"; ooes to Providesubsidy will not be providedat in consumption) & non-rivarly t"r1','puulic goods(non-excludability is required' all byfreemkt,Govtintervention

(o

tr

ri li
lr
I

( 10) (b) Discuss the viewthat the economicactivityof the government should be restricted to the provisionof public goods. ( 15) Approach: to explainthe differences are expected between the goodsin 2 aspects; For part (a), students failure of market & degree characteristics why govemmeht to explainfirstly; are required intervention For part (b), students is needed public goods. to explain it is necessary the Also, othermicroand macroobjectives to provide is neededto achieve activityof the govemment these. and why economic AnswerOutline: (a) goodsandpublicgoods: meriUdemerit between Differences of characteristics: In terms i) (give examples); Merit& demeritgoods+ rivalin consumption & excludable ::butmeritgoodsare sociallydesirable with positive extemalities whiledemerit goodsare socially with negative undesirable extemalities & non-excludable (give examples) Public aoods:+ non+ivalin consumption ii) ln termsof degreeof marketfailure: sectorcanprovidesuchgoods.However, Merit& demeritgoods+ private the level.Meritgoodsare underproduced optimum is not at socially output while goodsareoverproduced. Hencethereis a needfor govemment demerit intervention. provide goods+ private sectorwillnot if leftto market Public mechanism, goods public govemment mustprovide

(a) How do merit and demerit goods differ from public goods?

Conclusion (b) is needed to providepublicgoods intervention Explainwhy govemment . Non-excludable of free rider+ privateproducers = problern unable to collect payment fromthesepeople . Non-rivalin = MC = 0 = unprofitable to chargezeroprice consumption . Therefore, therewouldbe no provision mechanism, if leftto market of publicgoods. . However goods provide seMces to the are essential economy and these valuablq Thusit is the roleof the govemment to provide. to society. benefits andwhyeconomic objectives activity of the government andmacro othermicro is Explain these neededto achieve . To conectotherformsof marketfailures to bringabouta moreefficient allocation of resources (e.9.meritgoods) (e.9.demerit beneficial whether or adverse externalities leading goods) failure to a non-optimal allocation causemarket of resources pointof view fromsociety's . . of income To bringabouta moreevendistribution pricelevels rate or lowinflation stable To achieve

Conclusion

6t

2009 ACJC Prelim Exam Econ H2 Essav Question 3 a) Explain why the presence of traffic congestion is a source of market failure. t10I

b) Evaluatethe relative effectivenesso ft he curreni measuresby Singapore governmentto reduce the probtem of traffic congestion t15l SUGGESTED ANSWER. Negative is one of the causes externality that can leadto marketfailure.We will tacklethe issueof over usageof roadcausingtrafficcongestion in this case,the risingnumberof vehicles on the limited roadspace.Traffic congestion is a conditionthat occurswhenroad usage increases with the same roadspace,and is characterized by slowerspeeds,longertrip.times, queueing.Due and increased to imperfection of the pricemechanism, the road usageis beyond the socialoptimalleveland they are causingdeadweightloss to society. Students are required to explainthe following concepts to showthat the excessive usageof roadscan leadto negative externalities. . Private costs . Externalcosts . Socialcosts lllustration: Students are required to explain the diagram MPC, MSC

P"

P',,

o
(a) Marking Scheme

Q"

Qr

Q-

Knowledge, Application,understanding and Analysis L3 Clearexplanation of how excessive road usageleadsto negativeexternalities as one 7-10 of the sourcesof market failures.Clear diagramwith detailedexplanation to reflect trafficcongestion. Verytheoretical explanation of negative externalities relating to marketfailure. Undeveloped explanation anddiagram not clearly explained. For an answerwhich is gpish,and does not address the issueof negative externality 5-6 14

L2
L1

@ACJC2009PrelimExam H2 Econ/EssayQn3/p 1 of 3

hT EtchraE the relative effectivenesso ft he current measures by Singapore b reil.Ee the problem of traffic congestion.[l51

government

andthe answersshouldconsider the relative providea balanced discussion turffits n'nlst by eitherincreasing roadcapacity(supply), can be reduced Congestion of each policy. uftanmr,reress traffic (demand). ur tlt, .edrucinE l" CrOn*ership . that car buyers-rnust systemis a systemwhichdictates of entitlement) The COE (certificate The implementation of road purchase a COE beforeactuallybeingableto buy the vehicle. peripheral The purposeis to reduce,lhe costof a vehiclepurchase. tax is also an additional growthof car ownershiP.
' .7.'.

Eyaluationand relativeeffectiveness of cars,in this regard,car r is due to road usageand not mere possession coogstion are a bluntinstrument measures ownership . effecton increasing car usage.Oncea high car ownershipcostsmay haveperverse ln Singapore, average mileage is 21 000 km per it is usedvery intensively. car is bought, and 13900km in Melbourne. year compared to 9100km in London . costs and enforcement Thereare monitoring . should be done every 6 monthsfor all vehicles.Cars that inspection Compulsory oftenshouldbe testedat regularbasis. breakdown . Monitoringof traffic situations is perhaps the most effectiveway to reduce traffic of must be made over radio to warn motorists Regularannouncements congestions. are also needed. possiblealternative routes.More policepatrols 2. RoadUsaqe . . Electronic Road Pricing (ERP) ERPgantries were set up at roadsleadingto areaswith The duringpeak hoursheavytrafficas wellas the city areasto collectroad usagecharges purposeis meantto reducethe numberof carsenteringthe cityareasand redistributing.' to accessthe cityareas. thesecar usersto usethe publictransport . Taxon petrol.The underlying principle is'internalisation' . ln thisway,the MPCwillrise, to explain are required the diagram MSC.Students movingclosertoyvards
MPC, MSC

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ownership car ratherthan usase onroad

i^ dituril' is ri -^...L;^rr in practice ^ranrica ic costwhich of theexternar varuation :#"#;"";;;"""urate .T a xa ti o n p ro vi d e srevenuefor thegover nm enttofinancesocialandc or r r .r ,nn

congestionstill persists Despite tne cr,arges,traffic

Projects' develoPment 'ilun"r" ou on effect 'Theeffectivenessoftax in re d u c in g .p ro d uprice c t io n inelastic' . le v e |, is ' a ls of o ctax ons t ra inedby highly i* o"manJ oem"i. ot elasticity

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np"llll.'.n:,t: xo ta s, ie rev dto beem 'xJ::Iff;re TJ; has tax ::T11,':j'H:'1"J1"* ::f *, Road iaxes. the p"vins
f;"fii:lTJ:#[:,"'Tr"*5["t"nli,ii"v charges'
of ERP in favour reduced

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t[':::til:ffi ub] rikesingapglg: ctcity-state %a ' Fora compaq l f L?l:::*::tj.?" keyto ""t;i5:;:;i;i-i"dil"on pubtii,transport,,is its land transPort

urbanenvironment' a high.qY?l'ty congestion p'JJ"ting 'i#r'"i public "no aff6rdable,'the developmentof the . - To keep pubti" is fundedentirelyby the government' in-tr"rir-u"ture nutnotity for MRT and Public ny Land transp-ort . Fares ar" 'egutai"o for buses' Council Evaiuation and relativeeffectiveness .P ub|ictransport,"*i"" " t e n d t o h a v e s o me e le me n t s o f a n a t u ra lmo n o p o | y . T t I s with the MRT sYstem' particularlY on servinghigh demandroutes like . Bus operatorsare conc"ntratingmore at."-::ly.:l-t^":il^

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ii"nun'Jurong likeouttving"aiJ'"Lir" Road ,o.,,,r"ti.ns I Prc bv resurations despite inrrequenr

in dealirg poricies with its successfur coursewourdcontinue government.of Singapore Jarownership ---r^-r:-^ +r.^ withrestricting EpD crrcrem to otherroadsto solve 'Governmentisalsoconsi d e n n g e x t e n d in g t h e E RP s y s t e mt o o t h e rro a d transport' to use pubric the motorists is arsoneededto persuade ! i"*5:rl,"Srous attempt

(b) Marking Scheme

ed bY the SingaPore r( 6i afinalytic discussionreferrlng measure'__-the.better is of which -naerstan{ag analysis O"i^J..rparative --gv ' s r' rrrv ' r ;;;;;",;J di scussi ng the me a s u t : : . @isof in generat trafficcongestion On measuresto-reduce issueof relative "tr"iiir"n"t, iate economic measures theoretical of E'g' explanation to the ,.uouii;l ;t"'a oi S'pore' principles ------ ------'- -- --_-* nt on relative ' liketaxes,c?mpqgl's etu' ec on based FofeGltJatlve assessment

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