According to economic theory, the price mechanism in a free market will always allocate scarce resources efficiently for all goods and services. Evaluate the validity of this statement. [25]

This essay question was adapted from an actual H2 A level economics examination question

This economics essay evaluates whether the price mechanism in a market economy will always allocate scarce resources efficiently for all goods and services. This essay argues that, on the one hand, the price mechanism working in a free market economy will indeed allocate scarce resources efficiently, according to standard economic theory, because of the price mechanism can achieve productive and allocative efficiency. On the other hand, the allocation of scarce resources may not always be efficient, especially when there are market failures and resources are not allocated efficiently, leading to a situation of allocative inefficiency, which distort the workings of the free market.

First, we need to deal with the central problem of economics. Human wants are unlimited, while the earth's factors of production of land, labour, capital, and entrepreneurship are limited. Land refers to gifts of nature such as physical land, natural resources, and oil and gas, among other examples. Labour refers to human ingenuity, effort, time, and talent in the form of “human capital”. Capital in economics often refers to goods that are used to produce yet other goods. And entrepreneurship is the risk-taking, decision-making element that coordinates the other factors of production in an economy. This situation of limited factors of production that could potentially be allocated to different outputs, and the context of unlimited human wants, results in a situation of scarcity. It is important to note that economic scarcity necessitates choice, usually made between competing uses. 

Tutor’s Question: What economics diagram do you think should be drawn here? And how would this diagram back up your arguments?

The price mechanism, through the intersection of demand and supply, determines the optimal price and output and it is from the rational choices of millions of suppliers, producers, and firms meeting the requirements of millions of consumers, individuals, and households that eventually leads to the free market determining what to produce, how to produce, and for whom to produce. Demand is defined as the willingness and ability to purchase a good or service, ceteris paribus, while supply is defined as the willingness and ability to produce a good or service, also ceteris paribus. Oftentimes, one major assumption for this economic theory to work is the situation of perfect competition, where there are many buyers and sellers in a market, selling a homogeneous and non-differentiated good or service, and there are no (or very low) barriers to entry into the market.

Under the market price, consumers seek to maximise utility, and will therefore only consume if they are able to have a positive net benefit from the consumption of these goods and services. Those who are willing and able to pay will obtain the good and service. And the resources used to produce these goods and services will also be efficiently allocated, as producers maximise their profits. As a result, there is productive efficiency, since goods will be produced at the lowest cost combination to ensure profits are maximised, and price will be equal to marginal cost. On the whole, there is also allocative efficiency, since society’s welfare is maximised, and the Pareto efficient situation is reached, where we can only make some people better off by making others worse off in such an economic situation.

On the other hand, there are market failures in the real world, which may impede the efficient allocation of scarce resources. Market failure is the situation where the free market fails to allocate resources efficiently, and there is allocative inefficiency and deadweight loss to society. There are many types of market failure, such as the lack of provision of non-rival and non-excludable public goods, under-consumption of merit goods but over-consumption of demerit goods, externalities both positive and negative and also in consumption and production, imperfect competition leading to excessive market power in a market, imperfect information, factor immobility, and income and wealth inequality in a free market.

One major example is the under-consumption of merit goods. Because rational consumers seek to maximise their own welfare, they do not account for the positive externalities associated with the consumption of their good or service, which could be a merit good. There are many definitions of a merit good, but one definition is that a merit good is a good defined by society or the government to be beneficial to society, often because they bestow positive externalities on society when they are consumed. Externalities are defined as spillover effects to third parties not involved in the production or consumption of the good. Vaccinations provided by the National Health Service (NHS) are examples of merit goods, because they confer positive externalities on society, as when people who are vaccinated help by not infecting others and by making UK society healthier as a whole. However, an individual consumer only considers his marginal private benefit from getting vaccinated, and does not consider the positive externalities his vaccination confers on society – he would not take the positive externalities into account when making his economic decision. This decision results in an under-consumption of the merit good of vaccination, if the decision is left to the workings of the free market, and there is therefore dead-weight loss, as society’s welfare has yet to be maximised due to this under-consumption.

Tutor’s Question: What economics diagram do you think should be drawn here to support the merit good argument, which shows that markets do not always work efficiently?

Another example is the failure of the free market to produce public goods if there is no government intervention. A public good is one that is non-rival and non-excludable. Non-rival in consumption means that one person’s consumption of the good will not result in less of the good being available to others – or the consumption of the good does nothing to reduce the quality or quantity of the good for others, such as public lighting in the streets, where the amount of light cannot be “used up”. As a result, the marginal cost of the next user is theoretically zero, and if allocative efficiency means to produce where price equals to the marginal cost, and the marginal cost of producing the good is zero, then it follows that no private firm would produce the good only to  charge zero dollars (at the allocative efficiency level). And non-excludable means that non-payers cannot be excluded from consuming the good, for example national defence – it defends everyone in the country, including those who have not paid for it, such as foreigners or travellers, such as tourists. Therefore a rational firm would not produce this good because of the problem of free riders, where one who has not paid for the good has the ability to consume it. The government is the only decision-making body that has the willingness and ability to produce a public good, like street lighting and defence, as it has the mandate to do so for the welfare of its citizens (and therefore the willingness) and can raise the revenues to do so from compulsory taxes (and therefore the ability to do so).

In conclusion, while the price mechanism allocates scarce resources efficiently according to economic theory, this may not always be the case in reality, as there are market failures that challenge the assumptions upon which the efficiency of the price mechanism is predicated. Some government intervention is required in the free market to make it genuinely “free”, and to let the price mechanism work as it should. In the real world, with market failures such as the failure of the free market to produce public goods or the underconsumption of merit goods, or imperfect competition in the market, there is a strong need for government intervention in the free market to reduce or eliminate market failures so that the free market can go a long way to produce the optimal outcomes that the free market economists promise.

Economics Tutor's Comment - This is a top-quality, excellently-argued, and very strong economics essay which covers quite a few important points and arguments. The candidate's use of economic theory for market failure is quite strong in this economics essay and the anti-thesis arguments have been well-explained. Could more real-life examples have been used to demonstrate the arguments or the strength of the points? What else would make this economics essay even better than it is currently? Thank you for reading, and cheers! 

JC Economics Essays - This economics essays blog helps economics students with the A-Levels Economics examinations (Cambridge, A1/S, A2, H1/H2 A levels), and the international AS level economics examinations. IB students can also benefit from the economics materials and content in JC Economics Essays. This economics blog provides a range of useful and relevant economics essays, learning materials, study tips and techniques, and model economics essays that students in the United Kingdom, Malaysia, and Singapore, as well as worldwide, can use to excel in their studies and economics examinations.

This model economics essay was contributed by WT, our resident expert who helps students understand the beauty of Economics. She has wide-ranging academic interests in Econometrics, Economic History, International Trade, and Game Theory. And as always, SS, the editor of JC Economics Essays, edited this economics essay and also provided comments and pointers. Several editions and versions of this economics essay have been very popular, but do not accept them at face value and always think about how you would approach this economics question instead. Thank you for reading and cheers. 

How far are a government’s macroeconomic policy decisions affected by the extent to which the economy is open? Discuss. [25]

This economics essay question is adapted from an actual past year H2 economics essay question but modified to focus on economic decision-making

Generally, governments will face trade-offs when making decisions to choose between different macroeconomic policy objectives. How far are a government’s macroeconomic policy decisions affected by the extent to which the economy is open? Discuss. [25]

Governments often face challenging trade-offs when making macroeconomic policies. When they aim to promote high or steady economic growth, low unemployment, low inflation (or stable prices in the economy), and a healthy balance of payments, and sometimes even promote equity, there may be trade-offs, especially when economic policies are used. A trade-off is when one policy objective conflicts with another, and a choice has to be made between the two conflicting objectives - in other words, one cannot have one's cake and eat it too. 

In this paper, there are clearly defined trade-offs that we could discuss to illustrate the arguments. First, there is a trade-off between inflation and unemployment (often taught in schools in the form of the Phillips Curve); second, there is a trade-off between demand-pull inflation and actual economic growth; third, there are trade-offs between promoting economic growth and equity; and finally there may be economic conflicts in dealing with internal as opposed to external stability. 

This paper argues that policy decisions are affected by the extent to which an economy is open, but are also affected by other factors like the size of the economy and the stage of its development, which also need to be considered by governments when making economic policy. 

To achieve these objectives, macroeconomic policies are used - for example, fiscal, monetary, and exchange rate policies, and supply-side policies. Each of these economic policies affects the parameters that governments are trying to address. For instance, expansionary fiscal policy which involves increasing government spending and reducing direct taxes would lead to an increase in AD, which would increase the level of prices in an economy, if AD were near or at the full employment level. 

However, while this would raise inflation, it would reduce demand-deficient unemployment. In fact, expansionary monetary and devaluations of the exchange rate would also likely cause governments a trade-off between promoting economic growth, which tends to lower unemployment, and demand-pull inflation in general. The government of an open economy would need to take into account the fact that choosing exchange rate policy may lead to such a trade-off. 

An open economy would also face issues of internal and external stability - for example, to maintain a healthy balance of payments, for instance, a devaluation or depreciation of the currency would be useful. But this choice would need to take into consideration the fact that economic growth may increase and unemployment may fall, but inflation may rise! Therefore, it is quite clear that governments' policies are limited by the openness of their economy. 

However, openness is only factor. Other factors that have to be seriously considered are the size of the economy and the level of development of the economy. First, taking Singapore as an example - as Singapore is a small and open economy - Many of the demand-management policies, like fiscal and monetary policies, cannot be used. With a small multiplier (k = 1/mpw), and a relatively large external sector, exchange rate policies are more useful. In addition, supply-side policies - which may not address every economic problem we are facing - could be used, sparingly. 

Yet, this is not to say that larger economies can easily use economic policies as well - they would also face limitations to each policy, such as the Keynesian liquidity trap and interest insensitivity for expansionary monetary policy, and the crowding out effect for larger economies which would lead to a countervailing reduction in C and I for a rise in G. 

Development is important as well. Macroeconomic policies to achieve competing objectives do not have to be limited to traditional fiscal, monetary, exchange rate, and supply side policies - with globalisation, protectionist measures, the promotion of free trade through FTAs, and the use of international and regional institutions to promote growth and development also matter. A smaller, less developed country, for instance, when faced with openness could even use a range of policies - Import Substituting Industrialisation (ISI) at first and then maybe Export Oriented Industrialisation (EOI) later on. 

In the final analysis, to a large extent the state of an economy - being open, small or large, or developed - does affect a government’s macro policy decisions. In Singapore's case, policymakers must always take into account the fact that we are small and open, and therefore need to understand what policies we can and should take. At the end of the day, there will always be trade-offs, and a rational decision has to be made. 

JC Economics Essays - Economics editor's comments: A few years ago, I worked out some draft answers and responses with some of my former economics students. This piece was one of the economics essays that we had worked out for the 2012 H2 A level economics paper. However, because it is a draft, there are a few questions that students or readers should ask: How can this be improved? Other than examples from Singapore, what other countries could be used as examples? Always remember to give relevant examples that fit the question's requirements. Also, this paper is very strong in economic theory as my former students were good in theory - but moving beyond economic theory, could there be greater relevance to the question? The evaluation could also be much improved - while it makes the required moves by signposting and giving a few opinions, it could have a lot more detail. All considered, for a 25 mark economics essay, this answer is quite good as a response by a team of students. Thank you for reading and cheers! 

This is an economics blog that deals with economics views, perspectives, and opinions, as well as a range of economics essays aimed at A level economics students and IB students, even undergraduate economics students. There is a wide-range of materials on many economics topics and themes. Thank you for reading and cheers. 

View: Are The Water Price Hikes in Singapore Announced in 2017 Justified?

This economics view post is contributed by the editor of JC Economics Essays

The Budget and Committee of Supply Debates 2017 in Singapore had many economic policies announced. However, one major announcement stood out and generated a lot of debate, including many negative views – yes, the water price hikes, especially the figure of 30%.

In summary, the issue here is that the price of water in Singapore is set to increase by 30 per cent in two phases, from 1 July 2017 onwards.

This economics view post argues that while some may say the hikes are not justified, the reality is that the water price hikes are based on sound economics and are needed, necessary, and important for Singapore’s survival.

Before we delve into economic terms like "LRMC" and "pricing" and "infrastructure", there are of course, non-economic arguments based upon reasoning about Singapore’s strategic imperatives and our fundamental vulnerabilities.

Singapore’s Deputy Prime Minister Teo Chee Hean said, rather clearly, that water is critical to Singapore's survival, and Singapore has adopted a strategic approach in planning for its water supply. It may not be a very well-known fact that water is tied rather closely to Singapore’s sovereignty, a significant reflection that water is critical to Singapore’s survival. According to the National Library Board, the Separation Agreement signed between the governments of Singapore and Malaysia on 9 August 1965 guaranteed the 1961 and 1962 water agreements.

As DPM Teo went on to say, "Our struggle to make sure our people have water, is the struggle for Singapore's survival and independence… To make sure that we could survive, preserve our independence and thrive, we have taken a strategic approach to planning for water supply.” 

This strategic argument reflecting the importance of water has actually led to concrete steps taken to reduce Singapore's dependence on imported water and raise Singapore's water security. 

To reduce Singapore's dependence on imported water from Malaysia, the government has increased the size of the local water catchment area (in other words, reservoir water) and to build up water supply from non-conventional sources, namely NEWater (in other words, reclaimed water or less glamorously, “sai chui” in Singapore local parlance) and desalinated water (in other words, treated seawater), by setting up water treatment plants in various parts of Singapore. In total, these form the four national taps of Singapore.

The real success of the four national taps came in 2011. When the 1961 water agreement with Malaysia expired, Singaporeans did not face a disruption in water supply, and the event passed almost unnoticed.

DPM Teo went on to argue that, in the same vein, Singapore must prepare now for 2061 when the second water agreement with Malaysia, which currently meets half of Singapore’s water needs, expires. Besides preparing for the future, DPM Teo also warned of a more immediate worry (at least in the near term). Johor's Linggiu Reservoir is only one-third full and there is a danger of it failing in prolonged dry weather – and the water is needed by both Malaysia and Singapore. 

Other than the fact that the water source is under stress, while bilateral ties are sound today, where in recent years Singapore and Malaysia have shared a good relationship, what would happen if climate change and increasing water scarcity makes it challenging and difficult politically for Malaysia to export water to Singapore?

However, let us turn to the economics and look at the issue from an economics perspective. 

While housing, healthcare, and education are subsidised in Singapore, because they are essentially merit goods, it was argued in Parliament that water has to be priced fully because consumers must feel the price of water to realise its value. It is a sound economic principle that the ones using the water should be the ones to pay for it. In other words, the Minister of the Ministry of Environment and Water Resources, Masagos, is essentially right in terms of economic reasoning – water is not a merit good and should not be subsidised, whereas there are foregone positive externalities to society or there would be under-consumption of goods such as housing, healthcare, and education if they were not to be subsidised by the government. 

Now for the pricing itself, beyond the economic principles. 

Minister Masagos said in Parliament that even with the impending 30 per cent hike in water prices, the price of water here will fall short of the Long Run Marginal Cost (LRMC) — which is the increase in cost of producing an additional unit of water, over the long run, arising from increasing production. 

In other words, he argued that the increased price of water will bring up the pricing to nearer the true LRMC of water. 

With the 30 per cent increase, the price will be close to, though slightly lower than, the price of the next drop of water or LRMC. This is the best way to emphasise the scarcity value of water, because the price will fundamentally reflect the long run cost of the next drop of water – and this is based on economic reasoning. If the price is equal to the LRMC, production would be allocative efficient - a concept familiar to economics students, where the price reflects the additional (i.e., marginal) cost of production. 

In Parliament, it was revealed that the LRMC of water comes from the costs of NEWater and desalination. And between the two, Singapore will have to depend more on desalination – which is more expensive than NEWater – to meet increasing water demands, as there is a limit to recycling used water in the NEWater plants. For example, three more desalination plants will be built by 2020. 

And why are the relatively cheaper NEWater plants not being used instead? The answer is that as the proportion of water being reclaimed for NEWater increases, waste water becomes more concentrated, thus becoming difficult and even more costly to treat. 

In addition, it also costs the government more to build new and replacement pipes to deliver water - thus adding to the LRMC.

In the final analysis, while there are actually solid strategic reasons for raising the price of water to build critical infrastructure to ensure Singapore’s future, the price hikes are based on sound economics.

JC Economics Essays – This is an economics blog with views, opinions, and perspectives on a wide range of socio-economic issues. It also has a wide range of A level economics essays answers. 

Since 2007, this useful and popular economics blog has assisted students with economics essays, in particular the A level Economics examinations at H1, H2, and H3 levels, and the International Baccalaureate (IB) Economics too.

And there are many economics essays on this site that economics students can access, read, and reflect on for improving their essays and learn how to answer examination questions. Thank you for reading and cheers! 

A Summary: Singapore’s 2017 Budget Statement Aims to Build Singapore's Future Economy

This economics summary of Singapore's Budget 2017 is contributed by a former economics lecturer

What Happened? A Brief Summary of Budget 2017

In his 90-minute speech to Parliament on Monday, 20 February 2017, Singapore’s Minister for Finance, Mr. Heng Swee Keat, focused on future economic challenges facing Singapore.

With economic growth surpassing some economists’ expectations last year in 2016, Singapore's Budget 2017 looks to the future by earmarking S$2.4 billion to roll out multi-year economic schemes. 

These economic programmes are in addition to the industry-level transformation initiatives, totalling S$4.5 billion, rolled out in 2016’s budget.

But at a time of slowing economic growth in recent years, some S$1.4 billion is also set aside to help firms and workers, and provide additional economic support for individuals, households, and the disadvantaged, to help promote an inclusive society in Singapore. Even with economic support measures, the Singapore government still – nevertheless – wants to continue promoting a sense of self-reliance in companies, workers, and families, and encourage partnerships to drive the Singapore economy forward.

Some Economic Figures – Economic Stimulus

Broad economic stimulus measures were avoided, and instead the government aimed for targeted economic measures in 2017. As Minister Heng commented, "Budget 2017 is an investment in our economic transformation and social resilience." This is an important point. Budget 2017 is expansionary, with total expenditure coming to S$75.07 billion, some S$3.68 billion more than for FY2016.

The Singapore budget surplus, lifted by S$14.11 billion in net investment returns, is expected to be at S$1.91 billion, or 0.4 per cent of Gross Domestic Product (GDP). This is S$3.27 billion smaller than the FY2016 surplus. Nonetheless, Minister Heng reassured the House that "this budget position is prudent, while supporting firms and households in the midst of continued economic restructuring."

Singapore is Undergoing a Key Transition as Our Economy Matures

Budget 2017 comes at a time when Singapore is undergoing a "key transition" as the economy matures. Singapore’s open and trade-dependent economy reported 2 per cent growth for 2016, one of the slowest years since the 2008 global financial crisis. Structural economic shifts towards economic productivity are also weighing on companies and the labour market.

And the International Context is Changing and Evolving  

At the same time, deep economic shifts and economic uncertainties are happening rapidly and globally for trade and investments, businesses and jobs. In fact, Minister Heng commented that at the last Budget, issues like Brexit seemed remote and the US had just started the process of electing their new President. He further said that events since then were a stark reminder of how quick and unpredictable change could be.

Expand Overseas - Go, Go, Go 

Minister Heng unveiled a S$2.4 billion response, spread over four years, to execute the Committee of the Future Economy (CFE) recommendations. The report laid out economic strategies to help Singapore remain relevant amid a fast-changing world. Rejecting the inward-looking economic mood of some advanced economies, Mr Heng said that a key thrust is to help Singaporeans and companies tap overseas economic opportunities. In that vein, a S$600 million fund will be set up to support firms expanding overseas. Called the International Partnership Fund, it will co-invest with Singapore-based firms to help them scale up and internationalise.

Digital Economy – and Digital Economies

There will be economic help for small and medium enterprises to gain digital technological capabilities, and to use them effectively. Plans were also drawn up for research agencies like A*Star in Singapore to help companies tap innovation or co-develop intellectual property so that companies can grow.

But Singapore Will Support Firms and Workers in the Short Run

However, in a nod to the slow economic growth environment, Budget 2017 also responded to the near-term economic concerns of firms and workers. To tackle cyclical concerns, foreign worker levy increases for the marine and process sectors will be deferred by one more year, while S$700 million worth of public-sector infrastructure projects will be brought forward to support the construction sector. In addition, there will be enhanced corporate income tax rebates, while eligible businesses, especially smaller ones, will receive help in coping with higher wage costs. Some S$26 million per year will be set aside to help train workers looking to take new jobs or go for work attachments. Economic measures were also unveiled to support families, including more public housing grants and a personal income tax rebate of 20%, capped at $500, which is definitely a welcome measure in such tough economic times.

Sustainability – Spending Caps, Taxes, Carbon Taxes, and Water Taxes

With increasing spending demands, Budget 2017 put in place measures to ensure fiscal sustainability, while pointing to longer-term tax policy changes. For example, Minister Heng said that all ministries and organs of state will lower their budget caps by 2 per cent permanently. And a new carbon tax on emission of greenhouse gases was proposed, while water prices will be hiked by 30 per cent in two phases to reflect the increased cost of producing water, and to signal the importance of water to Singapore’s survival.

And What’s Next?

Singapore’s Parliament will convene on 28 February 2017 to debate the Budget, and then after the Budget Debates are concluded, the Committee of Supply 2017 debates will begin.

JC Economics Essays - Singapore Budget 2017 special. This short summary and opinion piece will help A level economics students understand the issues surrounding budget and the parliamentary process better. Thank you for reading and cheers! 

View: Income Inequality is NOT the Real Problem

This economics viewpoint is contributed by a former economics lecturer, and is inspired by his former economics students XB and ZB

Introduction to the View

This paper argues that, while many economists and journalists argue that income inequality is a problem in the world today, it is not fundamentally a real issue or problem, but the lack of economic growth and issues with social mobility are the larger problem. This paper takes a meandering view around various theories, ideas, and opinions surrounding this challenging and often controversial topic.

Income Inequality

What is income inequality? Income inequality is about the extent to which income is being distributed unevenly among a group of people. Economic inequalities are shown by people’s different economic positions within a distribution, in terms of wages, non-wage income, and wealth, for example. However, people’s economic positions are also related to other characteristics, for example, their level of disability, ethnic background, or gender.

Measurements of Income Inequality

And there are various ways of measuring economic inequality. 

While there is no systematic economic measure, and econometric statistics differ, there are some common measures, for instance, the Gini coefficient, which measures inequality across the whole of society. According to economic theory, if all the income went to one person and everyone else got nothing, the Gini coefficient would be equal to 1 (meaning maximum inequality). On the other hand, if income was shared equally, the Gini coefficient would equal 0 (maximum equality). In other words, the lower the Gini coefficient, the more equal a society, the coefficient itself being between 0 and 1, for those who are interested in mathematics.

And the Gini coefficient can measure inequality before or after tax and before or after housing or other related costs, and, most importantly for our purposes, will vary depending on what is actually being measured.

The Gini coefficient is also related to what is known as the Lorenz curve, another method of measuring income inequality. Basically, a Lorenz curve shows the percentage of income earned by a given percentage of the population. A ‘perfect’ income distribution would be one where each percentage received the same percentage of income. Perfect equality would be, for example, where 60 percent of the population gain 60 percent of national income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income. It might be interesting to know that the Lorenz curve is directly related to the Gini coefficient and the area under the curve can be used in calculations of the coefficient itself.

Issue of Poverty

Another related economic issue that has to be discussed when it comes to discussing income inequality is the issue of poverty.

What is it, really? People in poverty are those who are considerably worse-off than the majority of the population. Their level of economic deprivation means they are unable to access goods and services that most people consider necessary to an acceptable material standard of living, or to borrow an academic term, they lack economic affordances.

Absolute vs Relative Poverty

There are two main types of poverty that we can consider here. Poverty can be absolute, where absolute poverty refers to a level of deprivation that does not change over time, or a relative term in which relative poverty means that the definition fluctuates in line with changes in the general material living standard.

Inequality, by contrast, is always a relative economic term: it refers to the difference between levels of material living standards and/or income, across the whole economic distribution. In practice, poverty and inequality are correlated and often rise and fall together, but this need not always be so. For example, income inequality can be high in a society without high levels of poverty due to a large difference between the top and the middle of the income spectrum, especially in cities that are small and dependent on trade, such as coastal cities.

Technological Disruptions and Income Inequality? 

What causes income disparity? 

There are many reasons. It is my view, and the view of some respectable economists, that fundamentally, technological disruptions are right at the centre of income inequality. For example, some have argued that changing and evolving technology is the primary reason for the increasing income gap in the USA. For several decades after WWII, new technology was a great leveller in the US, providing good jobs for workers. In the 20th century, US income inequality reached its low point in the 1950s, when technological change was rapid and material living standards increased dramatically. But around the 1970s, technology’s economic impact began to change. It went from being an equaliser to a factor that became complementary to people who were highly trained and highly skilled. And, in that transition, less-skilled workers were left behind. This was also the time of globalisation, and in a related vein as we approached the financial crisis, there was massive deregulation, liberalisation, and lowering of corporate and income taxes which favoured the rich, wealthy, and skilled, vis-à-vis the poor, asset-poor, and unskilled workers who could not take advantage of these wonderful economic conditions that were propitious for those who could. (In this link, we discuss the economic impact of disruptive technology on Singapore.) 

Social and Economic Mobility 

Another related issue is one about social (and economic) mobility. In his very controversial tome Capital in the Twenty-First Century, Thomas Piketty noted that Napoleon justified concentrations of wealth and high levels of inequality in France because the nation was a meritocracy. If you worked hard and had talent, you could rise to the top of the metaphorical economic ladder. 

Some people say that such claims about income mobility have been made by the privileged at the top of the economic ladder. In fact, the American dream is similarly built on this central assertion. First used by the US historian James T. Adams in his book The Epic of America in 1931, the American dream is a term to describe the complex beliefs, religious promises, and political and social expectations in the US, and for a lot of people this American dream is connected to becoming wealthy and the ability to achieve everything if one only works hard enough for it. And for yet others, the dream is about liberty (not limited to economic liberty but certainly also making references to it) and the US being the country of unlimited economic opportunities.

What did Piketty say, Anyhow?

As an aside, who is Piketty in the first case, and what are his economic ideas? He has been rather famous for a few years now. 

According to The Economist, Capital in the Twenty-First Century was published in French in 2013 and in English in 2014. The English version became a bestseller, and prompted a debate on global inequality. Some economists even believe it caused a shift in the focus of economic policy toward distributional questions. 

According to Piketty, in the 18th and 19th centuries, western Europe was highly unequal. Private wealth dwarfed national income, concentrated in rich families who sat atop a rigid class structure. Only the chaos of WWI and WWII and the Great Depression in between disrupted this economic pattern of control. High taxes, rising inflation, and the growth of welfare states caused wealth to shrink dramatically, and ushered in a period in which both income and wealth were distributed in egalitarian fashion. (Do note the Eurocentric slant of his analysis and the provenance of his data.)

But the economic and political shocks of the early 20th century faded and wealth is now reasserting itself. On many economic measures, Piketty reckoned that the importance of wealth in modern economies was approaching levels seen before WWI. From this economic history, Piketty derives an economic theory of capital and inequality: other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it, and demographic change that slows global economic growth will make capital more dominant. 

But there are no natural economic forces pushing against the steady concentration of wealth. Only a burst of rapid economic growth, for him, either from technological progress or rising population, or government intervention can keep economies from returning to patrimonial capitalism. 

Piketty in fact recommended adopting a global tax on wealth to prevent soaring inequality contributing to economic or political instability. The book has attracted plenty of criticism. Some wonder whether Piketty is right to extrapolate about the future from past data. And economic theory suggests that it should become harder to earn a good return on wealth the more there is of it, because of diminishing marginal returns. Also, today’s rich, such as Gates or Zuckerberg, come by wealth through work rather than inheritance. Piketty’s policy recommendations are likely ideologically than economically driven.

Is There a Problem with the US' Social and Economic Mobility?

But many of the economic sceptics nonetheless have kind words for the book’s contributions. And since the last few years nonetheless, however, the findings of Piketty and other economists have entered mainstream debate, challenging long-held assumptions. From examples in the USA, bringing into focus how lopsided US income distribution is, findings have not only shown that inequality is widespread, they have also demonstrated that there is relatively little opportunity for those in the lower quintiles of earners to move up to a higher bracket.

Economic conservatives have long argued that inequality is fine as long as income mobility is robust. However, economic data gathered since the early 2000s have shown that US social mobility is low and has been so for half a century, and indeed, it is considerably lower than the US’ European competitors, where social safety nets are much larger and taxes much higher.

In response, many economic commentators and journalists have decried the unequal distribution of income and wealth and argued that governments should limit inequality at the top and make it easier for people to climb the economic ladder. There is an economic problem with this, however. Think about it. For every poor kid who rises to the top fifth in income, someone must fall out of the top fifth. And the proportion of those who rose was never robust, even in the nineteenth century. Some go up, and others go down.

What matters more is absolute social mobility: the degree to which the economy can produce rising wages for all. In other words, the American dream should be built on expanding opportunities for society, which can only come about if average real wages go up. Earning more than your parents is as much or even more a result of the rise of wages after inflation across the economy as it is a reflection of income mobility. In other words, if you are born into the bottom quintile but real wages rise, you will likely exceed your parents’ income even if you remain in that quintile.

Possible Solutions

What we now know is that we cannot rely purely on social mobility to solve these economic problems. Because there has been economic growth, about two out of three children these days are doing better than their parents. But many of them are not doing much better, and about half of this group remain in the same quintile they were born into. Indeed, rising income inequality also makes it harder to move from one quintile to another: the rungs on the economic ladder are farther apart.

Redistribution is not a sustainable solution to the whole complicated issue: For two decades, the inequality lobby tended to focus on a tax solution – how the rich can be taxed more and how that tax can be better spent on reducing the gap between rich and poor. It is not a good way to solve the economic problem, although it is definitely a fast way of creating flatter income graphs. 

Social and Economic Policies

And the main point for all of us is that a combination of social policies and economic growth policies are needed to produce wages for all. They could include a higher minimum wage (but not necessarily a Universal Basic Income or universal income), child allowances, and more and higher level educational programmes. 

But they should also include serious economic stimulus measures by governments to promote economic growth. And for example, government spending programmes should aim to sustain decent income levels through unemployment insurance, expanded earned income and child tax credits, and outright cash allowances. The government should also aim at foundational projects that facilitate long-term economic growth, including expansion of transportation and online infrastructure.

Have Faster and More Economic Growth

There is simply no escaping the central fact here that welfare depends on faster economic growth. In fact, there is always some inequality in any vibrant economy. 

The focus should rightly be on the vitality of the overall economy. And to that end, equality of opportunity which gives workers chances to succeed, is the bigger and more important concern that all governments should address. Give more economic chances - but how can the economy create more economic opportunities?

Entrepreneurship

The answer could be entrepreneurship. In a related issue, this whole issue is related to the fact that we need more entrepreneurs in society as a whole. When entrepreneurship drops, job creation drops, dragging economic growth with it. Perhaps, economic innovation, creativity, and the willingness to take risks will reduce and ameliorate income inequality and produce economic growth for all – so perhaps in the final analysis pro-growth entrepreneurship is the real economic answer to income inequality.

JC Economics Essays - We aim to be an economics blog with opinions, views, and perspectives. The article was contributed by S and he worked in conjunction with XB and ZB. The rest of the research came from academic articles. (XB once raised some of these important economic issues at a forum and some of the views are his.) Thank you for reading and cheers. 

View: The Economic Impact of Disruptive Tech on Singapore's Economy

This economics article is contributed by a kind reader

This economic perspectives essay deals with the rise of new, disruptive technologies, and their impact on Singapore's economy - and what Singapore can do to prepare for this technological change.

Today, the advance of new and disruptive technologies is unfolding on many economic fronts. While not every emerging technology will drastically transform the business or community landscape, some technological trends and changes do indeed have great potential to disrupt the economic status quo, massively altering the way people live and work. 

In fact, in late 2016, Singapore’s Prime Minister Lee Hsien Loong singled out technological disruption as the defining challenge among the economic issues Singapore is currently grappling with. As Prime Minister Lee (2016) correctly remarked, old economic and production models are not working, while new models are coming thick and fast. Singapore has to adjust and to keep up with these important trends, because of rising technology and globalisation. He is right. And technological disruption will happen over and over again, relentlessly. Both Singapore government and business leaders must not only know what’s new on the horizon, but also start preparing strategically for its impacts.

We could learn from economic history, which has already shown us clearly that earlier disruptive technologies, such as the personal computer for example, had the ability to sink technological market leaders, who were focused on their existing and most profitable markets and did not see or understand the threat looming upon them. Many examples readily come to mind, for example, Finland’s now-extinct Nokia phones, which once were prevalent consumer goods. And economic history already showed us that once new technological disruption takes hold, it typically enables a larger population of less-skilled or less affluent people to do more at lower cost, which previously could only be accomplished by specialists, who were oftentimes essentially technological gatekeepers. Personal Computers, for example, brought incredible computing power to individuals at a fraction of the cost of minicomputers, replacing the technological specialist and centralised data centers in the process.

Let’s examine the Singapore economy. Nearly every key sector in Singapore's economy is likely to face technological disruption in the next few years. Among the economic sectors likely to experience significant disruption in the near future are retail, Infocomm Technology (IT), financial and insurance sectors, administration and support sectors, and the accommodation and food sectors. In the longer term, up till 2020, economic sectors such as manufacturing, health, social services, and transportation and storage are also likely to be disrupted by technology. One example highlighted by Prime Minister Lee had illuminated the phenomenon of economic disruption in the taxi business in Singapore, which had been seeing greater competition from private car hire services such as Uber and Grab. All over the world, Uber and Grab are disrupting the taxi industry, but commuters are benefiting from better and more responsive service, but taxi companies and drivers find their business negatively impacted. 

In responding to these technological changes, PM Lee noted that one possibility was to close Singapore off from technological disruption and try to stop people from using the new technology, and the other possibility was to embrace technological change and let the technological disruption happen, but help the incumbents, especially the taxi drivers who would be negatively impacted, adapt to the changes. And PM Lee noted that taxi drivers had been level-headed about the competition, and had in fact made useful economic recommendations to the government on ameliorating the impacts of these technologies and adapting to their economic consequences.

And the Singapore government can play an even larger role in many areas to counter disruptive technology. It must ensure a deep pool of talent by investing in education, and developing and re-training and up-skilling people and raising human capital. In fact, Singapore's schools are giving students a lot of exposure to start-ups areas worldwide, and sending them to intern with venture capitalists and big tech companies. This is a useful and relevant development. Since a strong economy is built on a skilled workforce after all, SkillsFuture – Singapore’s funding programme for retraining and upgrading skills – is important. It has to be said that Singapore's schools are preparing its students well for the new economy of the future, and training them in values and skills to be future-ready for the 21^st century, where the skills and competencies needed are different, and where the new jobs will be different from the jobs of today. And in addition to upgrading workers in their current careers, the Singapore government is also helping retrenched workers to transition into new jobs.

And Singapore’s legislation and technological regulation must also catch up with changing and ever-evolving business processes. The Singapore government could also be an early adopter of some of these high technologies, setting an example for local businesses and giving them an opportunity to test some of these processes and establish a track record. For example, Fintech (financial technology) is at the centre of many of these processes, and another related big piece is data, data regulation, and IP (intellectual property) protection.

Beyond building up deeper capabilities and talents, investing in Singapore's legislation and regulation, Singapore should also promote a culture of entrepreneurship as well. Entrepreneurs play an important role in any economy, not just because they do business for themselves and create new jobs and prosperity, but also because they are resourceful and optimistic, and give Singaporeans the quiet confidence that anything is possible. They are often early technological adopters. Maybe, if Singaporeans are more entrepreneurial, we can not only survive technological changes, but also ride the wave of innovation and creativity to a brighter economic future. In other words, the future is not set - and we should start preparing for it now. 

JC Economics Essays - In recent posts on this economics blog, we have made a slight change in focus. We are now re-branding and re-marketing ourselves as an economics essays blog with opinions. While the economics essays, case studies, and other educational resources for A level Economics (H1, H2, or H3) are still available (along with undergraduate and GCE, GCSE, and other examination paper resources), in future, JC Economics Essays will be an economics resource with views, perspectives, and opinions. 

We want to share economics views and perspectives, to move beyond purely model essays aimed at improving grades. Not many economics tutors and students, especially those from A level economics tuition centres, actually have a real or novel opinion on a wide range of economics issues. Some of them do, and we want to share their opinions more widely. While, quite naturally, it is still important for economics students to get good grades, it is more important to have an informed opinion. We want to do more, and be more as a blog. We want to aspire to higher objectives. We also want to have a unique editorial and language style, and promote writing and perspectives on economic issues. And we hope you continue to support us and our change in focus. Thank you for reading, and cheers. 

View: If it is too good to be true, it probably isn't always - China's economic statistics

This article is contributed by a kind reader of JC Economics Essays

For many economists and pundits who long believed that China’s incredible provincial and national economic growth figures seemed too good and neat to be accurate, they now have reliable confirmation of their scepticism. While long dismissed as speculation or myth, there is now official news confirming their suspicions. 

What happened?

In 2017, the Chinese government finally admitted that some of its outstanding economic data was made up… which means that some of the economic figures were invented, created, man-made.

Before these shocking revelations, there had been many suspicions: an economic study by Harry X Wu in June 2015 estimated that from 1978 to 2012, China’s Gross Domestic Product (GDP) grew by 7.6%, which would be around 2.6% lower than the official 9.8% economic figure. Perhaps he got closer to the truth than we realise. In fact, it might have been interesting to note that Wu’s (2014) results indicated that Chinese Total Factor Productivity (TFP) growth was negative from 2007 to 2012. Over-building, over-capacity, under-utilisation, and the advance of the Chinese state into private sector markets were also substantially dragging China’s economic growth down.

Yet, despite this doom and gloom in the economic analysis, and the many suspicions, it was reported cheerily in official news that China’s economy expanded by 6.7% in the third quarter of 2016. Economists have sometimes wondered why China’s economic growth figures often look right on track to hit the central government’s target economic growth rates.

And in January 2017, China’s northeastern Liaoning province, which relies on the production of steel as its economic growth engine, reportedly inflated its economic growth figures from 2011 to 2014. 

The sheer scale of this economic deception is quite staggering. This province has a population of about 43 million, which makes it bigger than California in the USA. And this is the first time the Chinese government has publicly admitted to faking official economic statistics at any level. 

Also, what makes this economic case even more surprising is that fiscal revenues in Liaoning were inflated by at least 20% during the same period, and some other economic data there were also fabricated. These actions can be partly attributed to the incentives that rational and utility-maximising Chinese officials face when it comes to economic data. It is said (in Chinese) that Chinese officials produce the economic numbers, and the economic numbers produce officials in turn, which means that massaging economic data can help one get ahead in Chinese officialdom. People respond to economic incentives.

It can be quite breath-taking to think that the economic books are cooked. Some of the faked economic figures are in fact quite dramatic. According to the news agency Reuters, one county in Liaoning province reported an extra fiscal revenue of 847 million yuan (around US$131.3 million) in 2013, more than double the actual figure. And in one of the years, Liaoning’s GDP growth figures were reported at 9.5%, far above the current figure of a mere 2.7%. A pittance! 

And Liaoning had failed to hit government economic targets in key economic metrics in 2016, including economic growth, fixed asset investment, and exports. Since 2014, when Liaoning stopped inflating its economic growth figures, fixed asset investment, an important proxy measure of construction work, had been declining 60% to 70% per annum.

In China today, the falsification of local economic statistics apparently still happens in some areas from time to time, and the government will occasionally issue stern warnings of heavy punishment for those who fake official economic figures. Enforcement seems to remain an issue for China as it continues its economic rise. There are many economic implications: Investors may have to think twice about investing in China; their economic figures have to be taken with a pinch of salt; and most importantly, and surely not just tongue in cheek, there should be many, many jobs for real statisticians in China. 


JC Economics Essays. This is an economics blog with opinions. This economics article was contributed by SS. We thank our readers for their kind and generous personal contribution to this economics blog. The views and perspectives expressed in this article are the author’s own views and based on his own research and are all made in his own private capacity. The sources are available online and also publicly, although the framing and opinions are his. To recap, JC Economics Essays is an economics resource also has useful sample or model economics essays, economics questions, A level Economics examination techniques and economics case studies. Thank you for reading and cheers. 

Should governments always intervene when free markets fail to allocate resources efficiently? [15]

It should be recognized that free markets often fail due to allocative inefficiency, and there are various ways where governments can intervene to improve the outcome of resource allocation. However, governments should not always intervene as there are instances where intervention results in a less desirable outcome. This essay thus aims to analyse the pros and cons of the various ways of government intervention, and instances of government failure.

Yes, governments should intervene to improve the efficiency of free markets. Firstly, government policies to bring down the output level to the socially optimal output level can be divided into two categories, one market-based and another of direct control. A per unit output tax of the good raises production cost, thus reducing the output to the socially optimal outcome when there are negative externalities or demerit goods.

[Insert diagram for tax]

By imposing a per unit tax equivalent to MEC, MPC shifts to the left, thus bringing the output level down to Qs, coinciding with socially optimal output level. Hence, there should be intervention as it allows allocative efficiency to be achieved. 

On the flipside, an output subsidy would lower production costs, thus raising production to an output level coincidental to the socially optimal outcome, bettering the situation where there are positive externalities or merit goods.

[Insert diagram for subsidy]

By giving an output subsidy equivalent to MEB, MPC is shifted to the right, thus bringing the output level forward to Qs, the socially optimal level. Thus, allocative efficiency is similarly achieved.

While controlling output directly is a faster and more straightforward method, some may argue for the use of emission charges in the case of negative externalities as it advocates specific actions to cut down on the externalities which seem to some as a more long term solution. For example, in the case of pollution, emission charges induce firms to directly reduce pollution by the addition of a filter or the switch to less polluting production methods. However, there are limitations to such a policy as it gives high administrative costs due to the difficulty faced in monitoring emissions as compared to output.

When market-based policies fail to work, it may be sensible for the government to intervene with direct controls. An output ban could be used to forcefully bring down the output level to the socially optimal one. 

[Insert diagram on total ban]

An output ban will be advisable in the case where MEC is so large that the socially optimal output occurs at Qs = 0. In this case, a ban will be allocatively efficient. However, it should be noted that in a case where the MEC is relatively small, government intervention is not advisable as the outcome is even more allocative inefficient. As seen in the diagram above, when the government does not intervene, the area of welfare loss is smaller than when the government chooses to impose a total ban where quantity will be brought to zero. Hence, output bans are very extreme and thus governments should only intervene with a ban if MEC is large.

Another form of direct control would be direct free provision by the government to bring the output level to one that is socially optimal.

[Insert diagram on free provision]

For free provision, the MEB is so large that the socially optimal outcome occurs at Qs. Thus output has to be subsidized to such a large extent that the price of the good effectively becomes zero.

However, just like an output ban, free provision is very extreme and should only be used when the extent of MEB is very large. 

Where MEB is relatively small, MPC needs to be shifted to the right in order for socially optimal outcome to be achieved. Therefore, if the good was to be provided for free, the good will be over-consumed, resulting in a deadweight loss, implying that the outcome is worse than before intervention. Hence government should not intervene. 

In conclusion, despite substantial pros brought about by government intervention, the government should not always intervene as there will bound to be cases of government failure when the extent of intervention required is wrongly judged as seen from the examples above. Furthermore, the extent of administrative costs of some of the methods of intervention outweighs their benefits, translating to the view that the government should not always intervene.

JC Economics Essays - H1, H2, H3 Economics Essays - tutor's comments: While there is a lot of good economics material in this generally well written essay, the main problem is that it could have addressed the examination question more directly and targeted the answer better to the economics question specifically. Having said that, there are some saving graces to this economics essay. There is great use of varied economics diagrams, a lot of explanation, solid economic reasoning, and generally good application of economic principles and ideas, concepts, and logic. These save the essay quite a lot. However, better use of essay technique and more direct answering of the question would be great and would raise the grade achieved - also, lots of economics examples should also have been used. What other ways could be used to improve this essay? Think of how you could make this economics paper even better than it already is. 

Evaluate the economic policies currently used by the Singapore government to correct imperfect information and the immobility of the factors of production, two major causes of market failure. [15]

Adapted from an actual H2 'A' Level Economics examination paper

Just like many other countries, Singapore has also been experiencing problems of imperfect information and immobility of factors of production thus leading to market failure. The Singapore government has come up with some policies in hope to improve the situation. This paper discusses the economic policies used by the Singapore government to correct imperfect information and the immobility of the factors of production. 

               

First, to reduce imperfect information, the Singapore government has tried to improve the flow of information through the use of the Internet. As more people do their research on the Internet to find out more about what they really want or need, putting more information on the Internet can help to improve information flow, though it may be more helpful to only the younger generation.

               

The Singapore Government also implements rules and regulations of compulsory food labels on all packaged food. They also introduced the healthier choice and safety labels  on food and appliances respectively to help consumers to make better decisions when consuming a product. As for the insurance company, there is a certain guideline where consumers have to report their medical condition or the company will not cover for them. Although it is easy to implement these regulations, there is a high regulatory cost to it.

               

The Singapore Government also set up many job agencies like Recruit Express and JobsCentral to improve the flow of information so that workers and employers can find a job or worker more easily and efficiently.

               

The Singapore Government can also initiate campaigns to raise awareness among consumers to read up on the product and look for labels on them before consuming a product in order to make a better decision. However, this might have time lag and it is difficult to for them to start making it a habit instantly.

              

As for occupational mobility, since workers do not have the right skills to work, government can provide tax cuts for employers who send their employees for courses to upgrade themselves or learn a new skill so that they will be more efficient and have better ability to handle their tasks better. Nonetheless, this may not be a popular policy among employers as they are making a loss by sending their employees for courses as it will result in a smaller workforce working thus lesser production while having higher cost incurred due to the course fees. Although, the firm will most likely benefit in the long run, employers cannot be certain that the employees will stay with them for a long time, therefore losing the long term benefit.

               

The Singapore Government has also set up the Workforce Development Agency (WDA) where they work with the unique tripartite trade union that Singapore has to subsidise firms that send their employees for courses to upgrade themselves or individuals to pick up a new skills so as to increase job opportunities for especially the unemployed. WDA will also try to link up the unemployed with a job during the training sessions so as to reduce the amount of lag time. Furthermore, government has set aside a Skills Development Fund to aid these people since Singapore is a small and open economy that often experiences structural unemployment due to an ageing population with many older workers. However, this may not be effective as it is difficult for older workers or less educated individuals to pick up a new skill especially since they have no basics to build on. Also, many workers will only see these courses as a waste of their time since they can be using the time to earn more money in order to cover their living expenses.

               

In addition, the Singapore government has implemented compulsory primary education for all citizens. Being educated will help them to take up new skills in future since Singapore’s small and open economy forces us to adapt to changes quickly by developing new comparative advantages to catch up with time. However, this requires a large amount of budget to be placed into education in order to make education affordable for all.

               

Lastly, the Singapore government has come up with urban planning to solve the problem of geographical immobility. We started to have small regional business areas like Tampines rather than all firms to concentrate at City Business District (CBD). This will not only help individuals to travel less since most housing estates are in the East, it also helps to divert traffic away from CBD.

                

In conclusion, the Singapore government should use a combination of market-based and non-market based solutions, as well as consider their long term and short term effects, in order to better achieve pareto optimality and reduce market failure.

JC ECONOMICS ESSAYS - Economics Tutor's Comments: This economics essay has a lot of good material on the Singapore government, economic policies, and the Singapore context, which is excellent - always address your material to the context of the question. Answering the essay question with reference to real world, relevant, and specific examples is an incredibly effective exam strategy in economics examinations. Remember always to have good examples alongside excellent understanding of economic theory and models. However, the usual questions apply - how would you improve upon the essay introduction? What is good or what is not so good about the body of the paper? What is good about the essay conclusion? Take note of the excellent use of signposting in the conclusion. However, how could the conclusion be buttressed and developed? What else could the student have written, or how could the student have written the evaluative conclusion better? Think about how you would write a better conclusion to make this economics essay the best that it can be.