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Showing posts with label lack of mobility. Show all posts
Showing posts with label lack of mobility. Show all posts

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. 

Explain carefully why imperfect information and the immobility of the factors of production may lead to market failure. [10]


Explain carefully why imperfect information and the immobility of the factors of production may lead to market failure. [10]

Market failure can be defined as the failure of the free market mechanism to provide goods in a socially optimal and thus efficient manner, and is usually attributed to imperfect markets, the existence of externalities, the lack of provision of public goods, and inequity. Imperfect information and immobility of the factors of production also lead to market failure, because they directly contradict the assumptions of the free market system. The two main assumptions violated are firstly that all participants have perfect information, and secondly that the factors of production are mobile, such that they can respond to changing prices which function as a signal for producers to move resources into various areas of production. With those assumptions violated, Pareto optimality - when one person cannot be made better off without making someone else worse off - cannot be derived from perfect competition in a free market. This paper explains carefully why imperfect information and the immobility of the factors of production lead to market failure.

The free market system assumes that consumers have perfect knowledge of costs and benefits, thus the market-clearing equilibrium is able to be reached when individuals’ valuation of the good equal suppliers’ marginal cost of production; hence demand = supply. But in reality, consumers are often ignorant about the quality of the goods and durables they purchase. These are cases of imperfect information, which cause market failure as individuals are unable to fully obtain the marginal benefits of the good. As the market demand curve is derived by summing up all individual demand curves an optimal market equilibrium cannot be derived. On the supply side, firms are often ignorant of market opportunities, prices and costs, and may often make inaccurate estimations of market consumer demand or fail to respond promptly to demand changes due to errors in judgment. Thus market failure occurs.

Imperfect information is present when consumers and producers do not or are unable to consider society’s benefits and society’s costs, as reflected in the diagrams below.

Insert Economics diagrams here: HINT, draw externality diagrams. Why externality diagrams?

In the first diagram, there is an overproduction of a good distorting the market. Negative externalities, if unknown to producers, or if they merely consider their own private costs benefits and ignore society’s efficiency, also result in market failure, but this time in overproduction of a good.

In the second, there is an underproduction distorting the market. Consumers often have lower than optimal demand for desirable public goods, for example healthcare and education, as they only take into account current utilities, failing to judge the full extent of welfare and benefits the good delivers to society. This presence of unacknowledged positive negative externalities results in the underproduction of the good. Hence, the failure to acknowledge externalities is a lack of full or perfect information that distorts the market.

For private markets to function efficiently, factors such as labor and capital must be able to move freely. If factors are immobile, due to perhaps occupational rigidities and inefficient job seeking processes and bureaucratic issues, it affects the supply of these knowledge-based products. This immobility can lead to the wrong price signals and inefficient allocation of resources to these industries. For the socially optimal equilibrium to be reached, firms and labor must respond to market signals. When firms have trade unions as stakeholders, markets tend to fail as unions tend to aggressively seek minimum wage rates or protect their wage benefits or restrict entry of new labor, even in the face of declining market demand.

Hence, both imperfect information and lack of mobility of resources affect the workings of the price mechanism in the free market, and because perfect competition fails, then there is market failure, and the Pareto efficiency promised by perfect competition in the free market does not arise.


JC ECONOMICS ESSAYS - Tutor's Comments: This Economics essay is rather well written and addresses the issue of market failure well. There are many good aspects to learn about it. However, it was not written by an "A" level student but was written by a trainee teacher (trainee tutor) from education school. Perhaps, as improvement, the author should have also compared and contrasted asymmetric information with imperfect information. For more information on asymmetric information, see George Akerlof and Michael Spence (for further advanced Economics readings). 

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