Anglo-Chinese Junior College

2016 Promotional Exams (H2 Economics Essay Questions)

2. Cities around the world are coming to the same conclusion: they’d be better off
with far fewer cars. ‘’There will be less stress from being stuck in traffic jams; it
will be a more liveable city.” The Guardian, April 2015.

(a) Explain why markets might fail due to traffic congestion. [10]

(b) Discuss the most appropriate policies that should be adopted by [15]
Singapore government when market fails due to traffic congestion.

(a) Explain why markets might fail due to traffic congestion. [10]

Suggested answers for 2a

Focus: markets might fail, traffic congestion
Skill: Explain
Context: Traffic congestion

INTRODUCTION
 Explain Market failure: Resources are not allocated in the most efficient way
where it maximizes society’s welfare.
 Identify the source of market failure: excessive road usage leads to congestion.
This leads to an inefficient allocation of resources due to the presence of
negative externalities.
 What are negative externalities?
o 3rd party effects not directly involved in the production & consumption of a
good.

Body Paragraphs
A. Explain how the free market allocates resources.
Car users make decision with the aim of maximizing satisfaction (intended outcome)
 Car users would consider their
o Private cost: road tax, cost of maintaining the car, cost of petrol,
depreciation cost of the car for the additional trip, and the time lost when
the driver is caught in traffic congestion
o Private benefit: convenience and comfort of using the car
 Car users aim to maximize their satisfaction and would only account for their
private costs and benefits, ignoring the external cost.
 Market equilibrium occurs at Qm amount of road usage, where MPB=MPC.
Benefit/ Costs

MSC
B

E1 MPC
E

MPB= MSB

O Qs Qm Road usage
 Anglo-Chinese Junior College
2016 Promotional Exams (H2 Economics Essay Questions)

B. Explain why free market fails to allocate resources efficiently

 Drivers would ignore the external cost on third party.
 Negative externalities (with reference to road congestion): external cost to 3rd
parties not directly involved in the production and/or consumption of the good.
 External cost:
o Congestion  generates noise and air pollution that affect the quality of
living for residents living near the congested roads or road congestion
leads to workers reporting late for work and thus a fall in the revenue for
firms.
 Due to the presence of negative externalities, there is a divergence between
private costs and social costs by the extent of the external costs. MSC > MPC
(As MSC = MPC + MEC)
 Since there are no external benefits arising from traffic congestion, marginal
private benefit (MPB) is equal to marginal social benefit (MSB).
 When the external cost is taken into consideration and to maximize society’s
welfare, MSB=MSC  socially optimal amount of output=Qs
 However, Qm > Qs  over allocation of resources in the area of road usage (by
the amount QsQm)
 Road usage beyond Qs will incur a net loss to society as MSC exceeds MSB for
each additional unit of road usage.
 The excessive usage of road usage by QsQm gives rise to deadweight loss
marked by area E1EB. Hence, the government should deal with traffic
congestion.

CONCLUSION:
 When left to the free market, the number of cars exceeds the road capacity,
traffic congestion arises, which is a form of market failure.
Level Knowledge, Application, Understanding and Analysis Marks
L3  Well-developed explanation of how market fails when negative 8-10
externalities are present and its impact on resource allocation
 Excellent application of concepts by integrating the examples of
traffic congestion into the explanation.
 Diagrams are accurately drawn and well labelled with good
explanation
L2  Developed explanation of how market fails when negative 5-7
externalities are present
 Some attempt at using diagram for analysis. Explanation of the
diagram is not well-developed.
 Some application of concepts by mentioning the examples in the
explanation.

L1  Answer is mostly irrelevant 1-4

 May contain some conceptual inaccuracies.
 Undeveloped explanation of negative externality

 As resources are allocated inefficiently by the market mechanism, the

government has to intervene to reduce road usage to the socially optimal level.
 Anglo-Chinese Junior College
2016 Promotional Exams (H2 Economics Essay Questions)

(b) Discuss the most appropriate policies that should be adopted by [15]
Singapore government when market fails due to traffic congestion.

Suggested answers for 2b

Focus: most appropriate policies, market fails, traffic congestion
Skill: Discuss
Context: Singapore, Traffic congestion

Introduction: A brief intro of traffic congestion as a market failure and possible

measures
 Traffic congestion occurs when there are too many cars on the road, given the
road capacity. Therefore, it is necessary to note that policies implemented to
reduce the problem of traffic congestion must tackle the problem of car
ownership and car usage.
 The Singapore government has implemented a range of policies to tackle the
problem of traffic congestion. These policies include COE, ERP system and
improvement of the public transport system. It is important to note that main
cause of Singapore’s current traffic congestion problem arises primarily due to
excessive car ownership.

Development:
What measures does Singapore adopt to deal with traffic congestion?
How do these measures work?
How effective are these measures in addressing the problem?

Measure 1: Direct controls through quotas

 In Singapore, the government limits the number of cars that can be bought or
sold via a Vehicle Quota System. In this system, car owners must first purchase a
Certificate of Entitlement (COE) before they are allowed to own a car. The
number of COEs determines the number of new cars that can be registered on
the roads. And this number depends on the annual rate of car growth and the
number of vehicles deregistered in the previous period. The cost of the COE
(certificate of entitlement) will add to the price of new cars.
 Supply of COEs becomes perfectly price inelastic after the quantity set by the
quota, altering the supply curve to Squota. Assuming the quota is set at the
socially optimal quantity (Qs), overconsumption is effectively reduced to the
socially optimal quantity.

Price Squota
SS
Pquota

Pe

DD
Qs Qe Qty of COEs
 Anglo-Chinese Junior College
2016 Promotional Exams (H2 Economics Essay Questions)

 COE system is effective in managing traffic congestion because it allows the

government to manage traffic congestion through curbing car population
growth
o In setting a quota on the amount of new cars allowed on the roads
each period, the COE system effectively controls car population in
Singapore and aligns this with the speed of road development so as to
reduce the possibility of traffic congestion on the roads
o The use of the COE system results in a predictable outcome and
ensures that socially optimal quantity is achieved.
o As such, in targeting the vehicle growth rate, the COE system is
effective in managing traffic congestion in Singapore

Evaluation of COE
o COE is targeted at controlling car ownership. This means that, the moment an
individual gets to own a car, he/she is no longer affected by future changes in
the in the number of COEs issued.
o Curbing the number of COEs does not necessarily lead to a good control of
traffic volume on the roads. A smaller car population or a smaller increase in car
ownership may still result in traffic congestion if car and road usage are not
curbed.

Transition: However, high COE prices also encourage car owners to use the cars
more intensively, in an effort to get more ‘value’ out of the car before the COE
expires. This exacerbates congestion as drivers may continue to use the roads
frequently. Traffic congestion occurs when too many drivers choose to travel along
the same route at the same time, not so much due to the amount of cars in
Singapore. Hence the COE system does not tackle the root of the problem! Traffic
congestion is more of an issue of road usage rather than car population. Thus there
is a need for a more appropriate policy to control road usage.

Measure 2: Taxation & ERP

 Singapore has implemented various forms of taxes to curb the problem of
congestion which can be in the form of a lump sum tax or a per unit tax.

a) Lump Sum Taxes like Motor Vehicle Tax & Road Tax
 The government could also impose a lump-sum tax at the equilibrium level of
output. For instance, the Singapore government has implemented motor vehicles
tax (at purchase) and road tax (before the car is road-worthy). The imposition of a
tax raises the cost of owning the car (vehicle tax) or the cost of using the car
(road tax). At output OQm, a lump-sum tax equal to the welfare loss (area E1EB)
can be imposed. This will result in output to reduce from Qm to Qs.

Evaluation of lump sum taxes like Motor Vehicle Tax & Road Tax
o A taxation policy is suitable if the country is able to obtain accurate estimates of
the deadweight loss and hence, the amount of tax to impose  over-taxing may
result in under-utilising of roads while under-taxing may not significantly reduce
congestion.
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2016 Promotional Exams (H2 Economics Essay Questions)

o Motor vehicle tax and road tax seem to be more directed at controlling
ownership. Since road tax is a fixed amount of tax based on the capacity/size of
cars, owners will try to make as much use of the roads.

Transition: Hence the lump sum tax is usually a one-off tax that is targeted at
controlling car ownership. However, it does not affect the driver’s usage of the roads.
Thus there is a need for a more targeted measure to reduce usage of certain roads
by implementing a per unit tax.

b) Per unit tax like taxes on complementary good i.e petrol and ERP
 Taxation is implemented with the intention of internalising the external cost of
traffic congestion. Some examples are taxes on petrol and Electronic Road
Pricing (ERP).
 The amount of tax is equal to the marginal external cost (AD) incurred at socially-
optimum output Qs. As a result, the MPC curve shifts up by the amount of the tax
to the MPC+tax curve.
 This results in the cost of each journey to cost more now and it rises from Pm to
Ps. As the price of each journey increases, this leads to fewer cars on the road
and traffic flow is reduced from 0Qm to the socially optimal level of 0Qs.

Benefits/
Cost Figure 4
MSC
B MPCt
A
Ps MPC
C
Pm
D
MPB = MSB
No. of cars on the
O Qs Qm road
Evaluation of per unit tax & ERP
o Government may not have sufficient information about the external cost as it is
difficult to measure and quantify external cost (distance AD). Hence it would be
difficult to impose an accurate amount of tax and accurately correct market
failure.
o Petrol tax is more targeted at managing road usage because it affects the cost of
journeys. Effectiveness of this depends on Ped for car usage, e.g. jobs of car
owners (sales person vs. office-based), income level (rich vs. middle class),
where you work
o ERP only taxes drivers who use certain stretch of roads during peak hours unlike
road tax which taxes every driver who owns a car. Traffic congestion does not
occur on every road and all the time. In addition, ERP is a per-entry charge and
not exactly a usage charge. Thus the strength of ERP lies in the fact that it
targets at reducing traffic congestion at specific road during peak hour as
compared to road tax in general.
 Anglo-Chinese Junior College
2016 Promotional Exams (H2 Economics Essay Questions)

Transition: However, drivers may continue to use the roads frequently and taxes may
not be able to reduce traffic congestion. This is because the price elasticity of
demand for cars is relatively price inelastic due to a lack of strong substitutes. Thus
there is a need to develop viable alternatives of transport that people can use
instead of driving their personal cars.

Measure 3: Improve public transport system and road system

 With the above policies in place to reduce car ownership and car usage, it is
therefore necessary for the government to improve public transport (as a viable
and attractive alternative to private transport) so as to increase the PED for
private transport.
 Possible measures  build more roads and expressways, widen existing roads
to ease traffic flow, expand peripheral roads surrounding ERP areas,
underground tunnels, etc.
 Improve existing infrastructure  a more efficient public transport system, e.g.
Circle Line, Downtown Line.
 Thus there is a need to keep developing and improving the public transport
system by making it more convenient and the experience more enjoyable, such
that it is an attractive and viable alternative to drivers.

Evaluation of efforts to improve public transport and road systems

o The difficulty in implementing this policy is to provide quality public transport such
that it is a strong substitute for cars while being limited by cost constraints so that
it remains affordable for the general public.

Conclusion
As far as dealing with road congestion is concerned, the Singapore government has
implemented a package of policies that seek to reduce traffic congestion by
addressing car ownership, car usage and quality of public transport.
Have they done enough? What can else can be done? Can anything be further
improved? CAN TRAFFIC CONGESTION BE SOLVED?

Due to Singapore’s unique geographical restrictions, certain policies might be much

more effective in Singapore than in other countries suffering from the same problem.
 Anglo-Chinese Junior College
2016 Promotional Exams (H2 Economics Essay Questions)

Level Knowledge, Application, Understanding and Marks

Analysis
L3  For an answer that discusses at least 3 policies, which 8-10
are well-developed and evaluated to assess its
effectiveness. Some comparison with at least 2 other
policies needed for high L3, i.e. why taxation is not the
best and why it needs to be supplemented with other
policies in Singapore.
 Well supported with relevant examples which are
contextualized to Singapore.
L2  For an answer that discusses the effectiveness of at 5-7
least 2 policies which might not be fully developed and
one-sided analysis of policies.
 Lacks usage of examples and contextualization to
Singapore.
L1  Mere listing of statements, with little or no explanation. 1–4
 No economic concepts or presence of major conceptual
inaccuracies.
Allow up to 5 additional marks for Evaluation
E3 For an answer that arrives at an analytically well- reasoned 4-5
summative conclusion as to why a particular policy is most
appropriate in dealing with a particular area of the problem of
traffic congestion.
Examples:
 There is a need for these policies to work together as they
target different root causes of the problem. COE controls the
car population while ERP might be more appropriate to deal
with the excessive usage of certain roads. Hence both
policies are needed to reduce congestion in Singapore.

E2 Some attempt at evaluation or making a summative conclusion 2-3

but not consistently using economic analysis.
E1 For an unexplained evaluation or one that is not supported by 1
economic analysis.