EXTERNALITY
(2007)With references to examples, discuss whether there is a need to change current policies adopted by the Singapore government to deal with market failure caused by externalities. [25]
By looking at the positive and negative externalities in Singapore, we commonly have cars which results in negative externalities and education which results in positive externality, currently government had intervened to correct the market failure. But before we look at those policies, we will briefly discuss how does such externalities exist in Singapore.
Cars can be demerit good in which gives negative externalities. Negative externalities refer to the external cost incurred on third parties who are not involved in the transaction of the good. These third party costs, Marginal External Cost( MEC), are pollution and getting late for work. Traffic congestion which is the private cost causes time to be wasted when we are stranded on the bustling road, it also results in other people getting late for work. As such, decreases the economy's productivity. Also, the harmful emissions from vehicle exhaust contributes to air pollution which affects the health of third parties when they suffer from breathing difficulties and lung problems. These MEC causes the Marginal Private Cost to diverge from the Marginal Social Cost ( MSC) as seen above in the diagram.The equilibrium quantity of driving cars is at Qe where MPB=MPC but socially desired output is at Qs where MSC = MSB. This results in overconsumption of cars of QsQe units. Any consumption beyond Qs adds to more cost than benefits, thus at Qe, there is a welfare loss represented by shaded area. This means that there is inefficiency in allocating resources and hence market failure due to negative externalities.
What the government had done to attempt to correct the market failure is to curb traffic congestion via the use of the Electronic Road Pricing System (ERP). The ERP charges drivers for the usage of popular roads in
By looking at the positive and negative externalities in Singapore, we commonly have cars which results in negative externalities and education which results in positive externality, currently government had intervened to correct the market failure. But before we look at those policies, we will briefly discuss how does such externalities exist in Singapore.
Cars can be demerit good in which gives negative externalities. Negative externalities refer to the external cost incurred on third parties who are not involved in the transaction of the good. These third party costs, Marginal External Cost( MEC), are pollution and getting late for work. Traffic congestion which is the private cost causes time to be wasted when we are stranded on the bustling road, it also results in other people getting late for work. As such, decreases the economy's productivity. Also, the harmful emissions from vehicle exhaust contributes to air pollution which affects the health of third parties when they suffer from breathing difficulties and lung problems. These MEC causes the Marginal Private Cost to diverge from the Marginal Social Cost ( MSC) as seen above in the diagram.The equilibrium quantity of driving cars is at Qe where MPB=MPC but socially desired output is at Qs where MSC = MSB. This results in overconsumption of cars of QsQe units. Any consumption beyond Qs adds to more cost than benefits, thus at Qe, there is a welfare loss represented by shaded area. This means that there is inefficiency in allocating resources and hence market failure due to negative externalities.
What the government had done to attempt to correct the market failure is to curb traffic congestion via the use of the Electronic Road Pricing System (ERP). The ERP charges drivers for the usage of popular roads in