Question:

Examine the policies the Singapore government currently adopts to achieve an allocative
efficient allocation of resources when externalities are present, and, in the light of your
discussion, suggest whether some new policies need be introduced. [2 mar!s"
Possible Outline
Explain what is allocative resource allocation:
#t occurs where $% &'( &S) % &S'. *ssumption behind this: $erfectly competitive mar!et
+and the conditions associated with this,.
Externalities: -efinition.
/here are positive as well as negative externalities.
$ositive0-ue to under1production or under1consumption of the good.
2egative0-ue to over1production or over1consumption of the good.
3ive a brief explanation of positive externality in diagram form:
E.g. , 4igure 5:
'ost,
)enefits

Explain in the context of Singapore: 6 merit goods0 Education, healthcare and public
housing
5, Education in Singapore is subsidised across all levels +primary, secondary, tertiary,,
for e.g., school fees per month for resources, etc in a 7' is about S829. )ut in an
independent school it can be about S82::;. Education as a service will be <under1
consumed= if it weren>t subsidised +explain in the context of the diagram above,.
Evaluate the usefulness of this policy, but recognise that university subsidy may
be too much, given the little &arginal External )enefit +&E), that it generates.
'omparatively spea!ing, it ma!es more sense to subsidise lower levels of
education +e.g., primary, etc,, because of the high &E) they generate.
-iscuss possible new policies: e.g., granting loans?grants to students at
tertiary level only, since the &E) of university education is not so much as at
primary and secondary level. /he excess funds can be channelled to other
productive use Evaluate this new policy0 while it does ma!e more economic
sense, are we penalising our own people from doing higher education. Social
&$)
&S)
&$'
&$' ;
Subsidy
: Q
p
Q
s
Qty of good?time
ob@ectives may be more important0what if, as a result of only giving people
grants, there>s brain drain and people migrate since they do not wish to study
here for their university education.
2, Aur healthcare system: Be have subsidised wards, medisave, medicare +a form of
insurance, again evaluate these, recognise they help to correct under1
consumption, the problem of irrationality, ignorance, etc.
'ompare this with the welfare system of some western countries public hospitals
+government provision of free healthcare,. Bhat>s wrong with this. /here will be
over1consumption of healthcare, and more deadweight loss than if it were under1
consumed. 4rom the figure below, the deadweight loss * is greater than the
deadweight loss ).
4igure 2: Aver1consumption of Cero priced good

2ew policy: $erhaps more insurance. 'ould do with more medisave, which is
currently a little low.
6, Dousing: Be are given subsidised prices for D-) flats. Evaluate this.
Explain negative externalities in the context of Singapore and how our government chooses to
combat them. Examples of negative externalities0 5, congestion and 2, pollution
5, /o reduce congestion, government introduces EE$ +electronic road pricing,. #dea behind
EE$ is that the person who creates the congestion pays for it. EE$ acts as a !ind of
<tax= that is supposed to shift the &$' curve upwards, so as to reduce the Q
p
to be more
in line with the socially optimum eFuilibrium, QG.
Dow useful is EE$: evaluate. #t is a rough estimation, but it does help to reduce
congestion rather than no tax at all, etc etc +&ore elaboration reFuired,.
B
$rice, 'osts,
)enefits +8?F,
&$)
&S)
Q?t
&$' % &S'
)enefits
Q
QG
QH
*
2, /o reduce pollution: 'atalytic converters are mandatory. 'ars adhere to European
pollution standards here, and after some years, we are reFuired to scrap the car if it>s too
old.
*ny possible new policy in the wor!s.
Dow about a bus only lane for the whole day. )uses forced to go along such a lane
to reduce congestion, etc.
'urrently Singapore also has express buses that only travel directly from 5 point to
another, cutting out all the unessential stops. /his service is still in the preliminary
stages.
'onclusion. 2eed to provide a balanced view, with good evaluation points, in the light of all the
above.