(b) How far would the knowledge of demand elasticities be useful to a govt in devising policies that discourage the use of private cars? [15]

(b) How far would the knowledge of demand elasticities (PED, YED, XED) be useful to a government in devising policies that discourage the use of private cars? [15]

To discourage the use of private cars, there are a few policies that the government can implement. The government can implement policies to curb car ownership, curb car usage, or encourage the use of public transport. This paper argues that the knowledge of demand elasticities is useful to help governments in terms of car ownership, car usage, and public transport strategies, and to a large extent this knowledge is quite useful for helping the government make good decisions to tackle road congestion.

Firstly, car ownership can be reduced through a variety of measures. Car ownership can be discouraged by taxing the purchases of new cars, thus making them more expensive, thereby reducing the quantity demanded. Taxes shift the supply curve of cars to the left, thus reducing the equilibrium quantity demanded. Alternatively, an equivalent policy is to set a quota below the free market equilibrium quantity. A quota is a mandatory number of cars that limits the car population. By controlling car ownership, the population growth of cars is curbed and with a smaller car population, there will indirectly be fewer cars on the road.

Alternatively, car usage can be controlled directly using road pricing whereby motorists are charged for using congested roads. For example, in Singapore we have ERP. Electronic Road Pricing is a road toll system that reduces the usage of cars. This reduces the number of cars on that road, hence lowering the extent of traffic congestion.

Finally, lowering the fares or improving the quality and accessibility of public transport, for instance, lowering the fares of SMRT trains or raising the quality of SBS buses, encourages people to switch away from driving private cars to using public transport, hence reducing the usage of cars and traffic congestion in the process.

The knowledge of PED, YED, and XED are quite useful in helping governments devise policies to discourage the use of private cars. PED can be applied here. If demand is price elastic, a low tax rate is able to significantly reduce the quantity demanded. Hence an indirect tax is a suitable policy to curb car usage or ownership. However, if the demand is price inelastic, a very high tax rate is required to significantly reduce the quantity demanded. Hence indirect taxes are likely to be politically unpopular because the imposition of a very high tax rate can result in the government being perceived as being more interested in raising revenue rather than in curbing car usage. Hence a quota is probably politically more acceptable because the government is perceived to be controlling the quantity directly rather than trying to raise revenue. However if the government were to auction off the quota permits, they might again be accused of trying to raise revenue rather than fight traffic congestion.

YED can also be applied here. Knowing the income elasticity of demand enables the government to estimate the extent of the change in demand in response to a change in income. So as income rises with economic growth, the government is then be able to better determine how much car taxes should be raised so as to prevent car population and usage from rising. If the demand for cars is income elastic (i.e. normal luxury), car ownership and usage taxes have to be raised frequently and/or substantially as the country experiences economic growth. Again, the government might be seen as being more interested in raising revenue than in curbing traffic congestion so indirect taxes are likely to be politically unpopular while a quota is likely to be politically more acceptable.

Cross elasticity of demand (XED) measures responsiveness of the demand for a good to a change in the price of another good. It is calculated by taking the percentage change in the demand for the good over the percentage change in the price of the other good. XED can be applied here as well. Since public transport are substitutes to private cars, knowing the cross elasticity of demand for cars with respect to the price of a public transport enables the government to know whether cutting public transport fares is an effective way of curbing car usage. Alternatively, by improving the quality and accessibility of public transport, this makes it a closer substitute to private cars, hence raising the cross elasticity of demand between the two goods. Hence, for a given reduction in the price of public transport, there is a greater impact in curbing the demand for car usage.

In conclusion, knowing the various demand elasticities is to a certain extent quite useful in helping a government decide on which policy to choose. However, it is probably less useful in helping the government decide how much to tax or what fares to charge for public transport. This is because elasticity figures are estimated based on pass data, so they are not fully applicable to the current context as economic conditions tend to change over time. Hence, all elasticity figures should be considered carefully.

JC Economics Essays - Tutor's Commentary: This essay paper was written under exam conditions, and is still well structured, much like the companion complementary part (a). However, as usual, the usual questions apply: how can I make this essay better? How can I use an economics diagram to make this paper better? It has a good structure and is well crafted, yes. May I use this approach in my other Economics essays, or is this only applicable to this type of questions or only to elasticities? A quick word of advice here: please do not swot/ mug/ memorise Economics essays - try to understand the underlying structure, pattern, and system of writing, and always think to yourself - how can I make this essay better and more structured? Why do I prioritise the points this way? Why do I write like this? And how can I be better than I am already? Think hard and you will succeed.

(a) Explain why Singapore's car population grew by almost 40% from 1997-2012. (Rephrased question...)

Singapore’s car population grew by almost 40% from 370,000 in 1997 to 515,000 today. - Adapted and amended from Singapore’s Ministry of Transport (MOT) report. 

(a) Explain the likely reasons for the above development described in the Singapore car market. [10]

Introduction - Demand and Supply Factors

The rising car population in Singapore could be due to an increased demand for cars, or an increased supply for cars, or both, a simultaneous shift in both the demand and supply of cars. This Economics essay discusses the likely factors affecting demand and supply in the context of the car market in Singapore. Some major factors affecting demand are tastes and preferences, income and wealth, price of related goods, population and demographic changes, and ease of acquiring credit. Some of the factors affecting supply are prices and quantities of inputs affecting the costs of production, productivity, government policies, and numbers and size of firms.

Advertising by Car Sellers

First, rising tastes and preferences in favour of driving can force demand to shift to the right. For example, more persuasive advertising by car sellers can persuade people to have a preference for cars. In Singapore, there are many car showrooms along Ubi Road that show colourful and attractive car advertisements. There has also been a great interest in buying higher-end luxury cars, such as Ferraris and Porsches. 

Rising Incomes and Wealth Raise Demand

Second, rising incomes and wealth levels can shift demand to the right also. This is because economic growth leads to higher income levels, which increases demand for normal goods. Normal goods are goods that face increased demand when income rises, ceteris paribus. In Singapore, the Singapore economy has experienced strong economic growth from 1997 to 2008, and this could have affected the demand for cars, which can be considered either normal necessity goods or normal luxury goods.

Substitutes - Public Transport 

Third, there are related goods that can affect the demand for cars. Public transport can be considered a substitute for cars. A substitute is defined as any good that can replace another good. For instance, recently Singapore public transport fares have increased, thus causing some commuters to switch to buying cars instead.

Increases in Population - Foreign Talent Policy

Fourth, if the population increases, demand shifts to the right also. This is because more people entering the labour force and increased immigration will lead to increase the demand for all goods and services, including cars. For example, in Singapore, there is a famous foreign talent policy, which increased the number of foreigners in Singapore. Most of these foreigners could have bought cars and thus demand shifts to the right as a result.

Ease of Acquiring Credit, Falling Interest Rates, and Increased Demand for Cars

Fifth, an increase in the ease of acquiring credit causes demand to shift to the right, because a fall in interest rates makes it cheaper for households to borrow to buy cars. With recent events in the banking industry in Singapore, with Malaysian banks CIMB and RHB entering the markets in the last ten years, credit has become more easily available, thus shifting demand for cars to the right.

Supply Factors: First, Costs of Production

On the other hand, an increase in the car supply also affects the car market by increasing the vehicle population in Singapore. First, the lower price of car material inputs shifts supply to the right; for instance, cheaper steel lowers the marginal cost of production of cars, thus increasing the supply of cars.

Productivity and Technological Improvements

Secondly, productivity increases also shifts supply to the right, because with technological improvements, the marginal cost of production also falls, shifting supply to the right. For instance, overseas car companies, such as Ford car company, could have technological improvements which could increase the number of cars produced, which are imported into Singapore.

Singapore Government Policies

Third, government policies such as the lowering of car taxes or an increase in the quota of cars allowed also increase supply. For instance, if car dealers in Singapore face lower taxes or if the number of Certificate of Entitlements (COEs) is increased, supply shifts to the right. COEs are certificates allowing Singaporeans to buy cars. However, while a complete economic analysis of the impact of COEs is a more complicated exercise compared to simple supply and demand analysis, COEs as a system of quotas do limit the number of cars on the roads. 

Number and Size of Car Firms

Fourth, as the number and size of firms increase, supply will also shift to the right. For example, there are more car dealers in Singapore selling a wider range of cars such as Honda and Toyota. This could have also led to an increase in the supply of cars in Singapore.

Interaction of Market Demand and Supply: Demand is the More Likely Factor

In conclusion, while both demand and supply factors are likely determinants, the demand factor most likely for the increase in Singapore’s car population is the increase in Singapore's population. This is because Singapore’s population increased rapidly and massively from 3 to 5.5 million in 10 years. On the other hand, the supply factor most likely to allow an increase in car population is likely to be government policies, in the form of increasing the number of COEs issued from 1997 to 2008, thus indirectly raising the supply of cars on the roads.

JC Economics Essays - Tutor's Commentary: This Economics essay was written under timed conditions and was written by a JC 1 (Junior College year one) student. He eventually excelled in his studies, even beyond economics, and accepted a bond-free university scholarship to Nanyang Technological University (NTU), reading Public Policy and Global Affairs (PPGA) programme. He was one of my excellent English students when I was teaching in Secondary School. 

How you can improve this essay response is of course by adding a Demand and Supply diagram, with proper explanation and analysis. Now this is the thing - this excellent "A" grade student of mine did have the diagram in his original paper, but do remember that I am a luddite and so there's no DD-SS diagram here. He did need to explain and analysis the diagram beyond just drawing the curves. Be sure always to draw diagrams and explain them in your examinations. Usual Economics tutor's question applies: how can I make this economics essay better, or how can I improve on my essay writing skills? Thank you for reading, and cheers! 

(b) Evaluate the possible policies a government might adopt to deal with the above market failure.

The first part of the question: (a) Explain why pollution and congestion caused by cars may cause market failure. [10]

(b) Evaluate the possible policies a government might adopt to deal with the above market failure. [15]

(in this case, externalities, as can be seen in the part (a) answer above) (15)

There are many policies that a government can utilize to overcome externalities in terms of congestion and pollution. This paper suggests policies and highlights their pros and cons. The government can impose congestion charges, such as the Electronic Road Pricing in Singapore (ERP), impose quotas or taxes to control the vehicle population, such as Certificates of Entitlement in Singapore (COE), improve the public transport system, build more roads, and other miscellaneous policies. All these will be explained and then evaluated in this paper.

First, would congestion charges work? They might work as the government is forcing drivers to internalize the externality. In this case, drivers will internalize the negative externality. What does this mean? Internalizing externalities means that the drivers are forced, by the use of the congestion charge, to factor this additional cost into their calculations, hence reducing the number of trips they take and raising the private cost of driving to the drivers. This suggests that congestion charges are an excellent government policy that would have a high chance of working precisely because they makes drivers consider social costs as private costs.

Insert economics diagram. What diagram goes here?

The diagram above demonstrates the core idea of congestion charges, which is to shift q1 to q2 and p1 to p2, which shifts the private cost curve to the social cost curve.

Yet, the problem is that the government may further distort the market instead of getting a desired outcome because of imperfect information. The government may want to know but it cannot. There is no way for the government to know exactly what and where the socially optimum level of driving is because in reality, such data is impossible to find. How much congestion charge should the government charge?

In addition, the government might find it hard to adjust congestion charges because of political reasons. Should the congestion charge be high, possibly solving congestion and pollution, but endangering political success at elections; or should the congestion charge be low, possibly not solving congestion and pollution, but being more acceptable? It seems that theoretically congestion charges tackle the core issue of the overconsumption of car journeys by making drivers internalize the externality, but in practice there are many unaddressed and difficult issues.

Controlling the population of vehicles is another possible solution, where governments target the supply of cars and not the demand for cars. The Singapore government, for instance, uses COEs to control the supply of cars, as whoever wants to drive needs this licence to own a car. The total number of cars can be thus controlled with this kind of quota, which limits the total number to a cap. In comparison with congestion charges, COE does not restrict the use of the car, but reduces car ownership, with the central idea being that there would be less congestion and less pollution with fewer cars around.

Yet controlling the population reduces the total amount of pollution, yet may not reduce congestion. The reason is that congestion depends primarily on usage, which can be thought of as how many cars are out on the road at any given time. During peak hours there would automatically be congestion, even if governments were to reduce the total number of cars. This is because the cars are on the road at the same time. Hence, controlling the vehicle population is a good idea but should be done in conjunction with reducing usage as well.

Improving the public transportation system is yet another solution. This would provide an alternative to using cars as a means of transport, or as we say in economics terms, a substitute. By subsidizing public buses and trains, and making them more affordable and convenient, the use of cars would be lessened, and congestion and pollution would be reduced. For instance, people who would drive will decide to take the bus, and there would be fewer cars on the road.

However, with the exception of trains, buses produce pollution as well, and while reducing congestion would not necessarily reduce pollution if more buses are put on the roads. Also, the cost of improving public transport might be prohibitive, where governments face the opportunity cost of the money forgone for other more pressing uses, and there might also be strong opposition from people who prefer their own cars. All considered, however, improving public transport would still prove to be a good method of reducing congestion and pollution.

Another solution by governments is usually to build more roads, as by building roads, there would be less congestion. However, the issue is that road building does not solve the underlying problem, which is the externality. There would still be many cars on the road, and the decisions made by private individuals would still conflict with the social good. Unlike the other methods discussed earlier, road building does not reduce the usage of cars, and does not reduce car ownership. Hence building roads helps win elections more than it does actually solve congestion or pollution, which are market failures by nature.

Moral suasion and other non economic methods could also be used, but they are short term and still do not address the underlying negative externality. For example, posters and public education are not that effective in reducing overall car usage in Singapore. Therefore, they are also not heavily used in most other countries as well as compared to the methods of reducing car usage and ownership.

In conclusion, a government has many ways of dealing with congestion and pollution, but each policy chosen has pros and cons which must be carefully evaluated. Controlling car usage by the use of congestion charges like ERP make consumers internalize the negative externality because they consider their private costs and not social costs, yet there are political repercussions and informational challenges. Reducing the total number of cars will bring about less congestion and pollution overall but does not solve the problem that car usage is concentrated at certain times. Improving transportation systems would be a good idea if the cost were not too oppressive, as there would be an opportunity cost in terms of other more pressing governmental projects. Building roads and moral suasion might not be sustainable. Therefore, all considered, a mixture of various policies should be used rather than a one size fits all policy that pretends to be a panacea but is not.

JC ECONOMICS ESSAYS Tutor's Comments: This Economics essay is very well written and addresses the question fully. How and why? Think about it. How would you improve this essay, or how could you approach this question slightly differently or alternatively? This Economics paper was also professionally written, jointly with part (a).