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Evaluate the policies used by the Singapore government to correct imperfect information and the lack of mobility of the FOP? [15]

Evaluate the policies used by the Singapore government to correct these causes (imperfect information and lack of mobility of the factors of production/ resources) of market failure. [15]

Tutor's Quick Note: This is a continuation, part (b), of the previous question on this economics site.

There are many policies that the Singapore government can implement to correct market failure due to imperfect information and due to immobility of resources. This paper evaluates the Singapore government’s policies in correcting imperfect information and lack of resource mobility, and the evaluation here is whether these policies solve the underlying cause, causing the market failure, directly.

First, we examine subsidies for merit goods like subsidized healthcare, to compensate for consumers’ undervaluation of them and suppliers’ underproduction of them. Secondly, we also examine state intervention in the form of taxes to solve negative externalities. These two examinations address positive and negative externalities which are unknown or unconsidered by private consumers and producers and thus cause market failure.

Insert Economics diagram. Think: which diagram is relevant here? How would you explain it?

The economic answer is clear: increasing subsidies solves the problem of positive externalities being unacknowledged, while increasing taxes solves negative externalities. For instance, there are portions of the budget set aside for subsidized healthcare for senior citizens. Provision of food stamps and rations for low-income families, a wide umbrella of social services to provide free counseling for problem cases such as troubled teenagers, marital and family problems, and other services which private markets tend to fail in. These subsidies cost money, and perhaps that might be a problem, due to opportunity cost, which is the cost of the next best alternatives foregone. Yet, it is still possible to argue that using a cost benefit analysis the costs of the subsidies are worth it.

Furthermore, smoking, which is a demerit good, which has negative externalities, is heavily taxed in Singapore. These show that the Singapore government has done the right thing by removing distortions caused by people not taking externalities into account. The underlying causes indeed were taken into account.

Secondly, there can be the direct provision of information, for instance, with respect to smoking as well as insurance and unit trusts. The public often over-value demerit goods like cigarettes and tobacco, causing market failure as consumers overestimate the marginal benefits of it. The government thus runs a full series of anti-smoking campaigns trying to educate consumers such that they make informed decisions and are fully aware of health consequences in purchasing cigarettes. This does not fully correct market failure but mitigates it. Regarding cost-benefit analysis, this is viable due to the low costs of mass media campaigns but sustainable benefits of consumer knowledge. In Singapore, there is the Financial Advisers Act, under which independent advisory firms act as intermediaries between agents (insurance companies) and principals (consumers), acting to inform and educate consumers fully about insurance products from all insurance firms and providing proper product recommendation. This policy can correct market failure in the long run as many consumers are reliant on private insurance providers. However, it has its sustainable benefits as independent advisory advisers earn their remuneration from the portfolio growth of their clients, thus aligning their interests. Lack of information thus necessitates more information. Therefore, possibly the underlying causes were taken into account.

In Singapore, the most immobile form of capital is labour, which the government has targeted constantly. Capital flows are all flexible in Singapore, as from the beginning we have had a focus on external MNCs and foreign direct investment. We focus here on labour. Has the government done a good job here?

The government can solve the problem of immobility of factors of production: first, job matching and training schemes to link up supply and demand forces in the labour market. Colleges have job centers to facilitate the process in which graduates get their credentials matched to suitable jobs. Similar job matching centers under the National Trades Union Centre (NTUC) are widely available, all measures to improve structural rigidities, to reduce time-lags in factors of employment is responding to market demands. Perhaps the only criticism might be in terms of costs of training and opportunity costs. The underlying economic causes were taken into account. Increasing information and increasing training solve frictional unemployment and structural unemployment and hence reduce immobility of labour greatly.

Regarding trade union pressures, all agents representing workers’ benefits come under the NTUC, which tries to incorporate employee and firm interests, aligning them to national interests. Politicking at workplaces and lobbying are actively stopped by the Singapore government. This is a measure that only works for Singapore, in which political power is centralized and the state can intervene. Singapore’s uniqueness works in its favour here.

However, for other countries with many federal states, lobbying and union pressure is still abundant, which proactively try to manipulate prices and market systems for their own interests. Hence it might be only possible for Singapore to use the internationally famous tripartite method of solving immobility of labour.

In conclusion, Singapore has many heavy duty weapons in its arsenal for reducing imperfect information and immobility of labour. However, any policy used must be checked for its effectiveness in solving the underlying problems that cause the market failure.

JC ECONOMICS ESSAYS Tutor's Comments: This was written by a former Economics student of mine (from MJC) under examination conditions. I would not have approached this economics question this way; however this quite skilfully written economics paper is very good and very clear. Do, however, ask yourself a few questions. How would you have written it, to address the question? How would you have improved on it? There are many other ways to approach this question that would have also adequately addressed its specialised requirements. Do remember to think of how you can learn from this Economics essay. Thank you for reading and cheers. 

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