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.