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3. How far can efficiency in resource allocation be achieved by encouraging competition

in Singapore?
[25]
Introduction:
Identify that encouraging competition is a form of government intervention undertaken to resolve
market failure that arises from market dominance.
Explain market failure - failure of the unregulated free market to allocate resources fully and
efficiently.
Explain key sources of market failure market dominance, presence of externalities, imperfect
information and failure of the free market to provide public goods.
Explain the objective of government intervention in the markets for goods and services
In the event of the failure of the free market, the governments intervention aims to achieve
the microeconomic aim of allocative efficiency
Explain concept of allocative efficiency
o Net social benefit or maximum total surpluses occurs at an output level where the valuation of
(or benefits to) consumers for the additional unit of the good produced (P) is equal to the
opportunity costs incurred in using resources to produce that additional unit (MC) (i.e. Price
Marginal Cost)
o The optimum output for the society is at QC where the price, PC is determined by the point of
intersection of the market demand curve (AR) with the supply curve or the MC in the case
where there is no market dominance (i.e. in a perfectly competitive market).
o At output QC and price PC, total societal surpluses (consumers and producers) could be
maximized, where P MC.
ody:
1. rief explanation of how market dominance causes market failure.
Explain what is meant by market dominance ability of the firm to control price and exclude
competition
o Monopoly sole firm in the industry
capture total market DD
o Oligopoly a few dominant firms in the industry
few firms each having a significant/large
market power
o Examples of monopolistic or oligopolistic markets :
Oligopolies include telecommunication industry in Singapore, Integrated Resorts (MBS and RWS),
Banking industry in Singapore (explain wrt characteristics above) while a Natural Monopoly would
be that of Public Transport (egg. MRT) Industry/ Media
Explain how market dominance leads to market failure (with the aid of a diagram)
o Identify the objective of the firm to profit maximize
o The high market share implies firms demand curve (AR) is rather price inelastic. Hence there
is a fairly large degree of exploitation for every unit of output produced when there is market
dominance by a firm.
o So when firms choose to restrict /set output at the level where the additional revenue gained
for an additional unit produced (MR) equals the additional costs incurred for that additional
unit produced (MC) i.e. at Qm where MR MC (profit-max condition) and MC is rising
o Setting output where profits are maximized (MR MC) results in an equilibrium price, P m, set
above marginal cost (P MC) at Qm.
o At Qm ,the valuation of (or benefits to) consumers for the additional unit of the good produced
(P) is greater than the opportunity costs incurred in using resources to produce that additional
unit (MC) the vertical distance of the divergence represents a degree of consumer or
monopolistic exploitation, representing the extent of allocative inefficiency caused by market
dominance.

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Price/Revenue/Cost
MC

SS PC Industry

Pm

Pc

MC
D

MR
o

AR

DD PC Industry

0
Qc
Qm
Quantity
Hence so long as the output produced and sold is where P MC, the output produced will be
less than the socially optimum level, at Qc (underproduction of goods and services by the
amount QcQm)
consumers and producers surpluses (total surpluses or societal welfare)
are not maximized
there is market failure and an inefficient allocation of resources
Deadweight loss on the society of area BCD.

2. Thesis: Efficiency in resource allocation be achieved by encouraging competition in

Singapore
Highlight the role of the Competition Commission of Singapore (CCS) in the case of market
dominance:
o Increasing competition in markets
include pro-market government policy such as
liberalization, deregulation
o Singapore Competition Act: legislation / regulation anti-competitive laws
Explain rationale for Intervention (Use economic framework):
o The introduction of greater competition into the Singapore markets
reduces market power
amongst firms
DD falls (AR1 and MR1 shifts left to AR2 and MR2) and price elasticity of
demand increases (potential weakening of market power due to availability of substitutes)
lower prices from P1 to P2
decreasing the divergence between P and MC
reducing the
extent of allocative inefficiency. Also, because total level of output increases in the entire
industry due to the increase in number of producers
move the equilibrium level of output
closer to allocatively efficient level.
o The introduction of greater competition
increase dynamic efficiency and responsive to
consumers needs
better, more innovative services, more promotional offers
consumers
enjoying a wider variety and quality of products or services egg. Telcos provision of cable TV
include on demand TC, type of programs etc.

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Price
MC
P1

P2
MC1
MC2
MR1

AR1
AR2

MR2
0
Q2
o

Quantity

Q1

The introduction of greater competition

reduces cost-inefficiency (X-inefficiency) of a firm
with market dominance due to the lowering of supernormal profits that can be used to cushion
unnecessary increase in costs
forcing firms to be more productively efficient from the firms
point of view.

3. Anti-thesis: Efficiency in resource allocation may not necessarily be achieved by

encouraging competition in Singapore
(i)

Explain that encouraging competition need not necessarily help achieve allocative efficiency in
the case of a natural monopoly (market dominance that arises due to natural BTE)
Briefly explain the case of a natural monopoly & how it is inevitable but may still result
in the failure to achieve allocative efficiency.

AR(1/2)

As shown above, a natural monopoly possesses the distinct characteristic in which the
LRAC of the firm falls continuously as output expands as the MES is large and there is
room for only one firm to fully exploit all of the available economies of scale, hence
being able to supply the entire market at a lower price than two or more smaller one.
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The key point is that a natural monopoly exists when there is scope for economies of
scale to be exploited over a very large range of output relative to the entire market
demand.
In such industries where there is a high ratio of fixed to variable costs. The high fixed
costs of building a national or regional infrastructure distribution network for a product
might be enormous, but the marginal (variable) cost of supplying extra units of output
may be very small. In this case, the ATC will continue to decline as the scale of
production increase, because fixed (overhead) costs are being spread over high and
higher levels of output. Examples include the national grid for electricity transmission,
gas transmission; the building and maintaining a countrys telecommunications network
for broadband industry; etc.
Explain that in the case of a natural monopoly, introducing competition is detrimental to
its existence since it is not possible for 2 or more firms to exist, each charging the
same price and supplying half of the industrys output as there is no price that would
allow them to cover cost. Introducing competition in this case will only result in firms
leaving the industry due to subnormal profits reaped
non-provision of the good
allocative inefficiency rises
Instead, for natural monopolies, there are other better ways of government intervention
such as engaging in price regulation i.e. MC pricing in order to achieve allocative
efficiency.
Briefly explain how MC pricing works to achieve AE in natural monopolies, with
reference to the diagram.
(ii)

Explain that there are other significant sources of market failure in Singapore that are not
necessarily resolved by encouraging competition. (Provide real life examples for each of
them)
Market failure arising from the presence of externalities, in particular negative externalities in
Singapore from the usage of motor vehicles, is a major source of market failure due to the longterm impact of prolonged damage of environment because of pollution as well as the immediate
negative impact such as traffic congestion.
o Explain how market failure arises from the use of motor vehicles (use a diagram)
o Briefly explain why such a source of market failure cannot be resolved by introducing or
encouraging competition. (failure in addressing the root cause of over-consumption)
o Instead, in order to achieve allocative efficiency, the government has to employ market based
(ERP charges that work like a tax) as well as non-market based policies (COE that is a quota
on purchases of new cars) to resolve the market failure problem of over-consumption of motor
vehicles. (Briefly explain how these policies work)
Market failure arising from positive externalities and imperfection of information manifests
itself in the form of the under-consumption of merit goods that are deemed by the government to
be socially desirable, such as basic healthcare, education and public housing.
o Using a diagram, explain how market failure arises from the consumption of merit goods.
rd
(failure to take into account of external benefits on 3 parties in the case of positive
externality associated with consumption of merit goods as well as ignorance of potential
private benefits associated with consumption of the good, hence underestimating the private
benefits in the case of imperfect knowledge)
o Briefly explain that the allocative inefficiency that has resulted from under-consumption
cannot be resolved through the introduction of competition.
o Instead, in order to achieve allocative efficiency, the government has to intervene in the
provision or subsidization of merit goods through market based policies such as subsidies
(targeting the internalization of external benefits) or non-market based policies such as
launching mass public education programmes to raise awareness of the importance of
consuming such services, hence resolving imperfection of information. (briefly explain how
these policies work)
Market failure arising from the non-provision of public goods by the free market, in the form
of provision of national defence and street lighting etc.
o Explain how the twin characteristics of non-rivalry and non-excludability of public goods
present a case of market failure (missing market)

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o
o

Briefly explain that in the case of the non-provision of the public good by the free market,
introducing competition does not resolve the allocative inefficiency problem since the free
market chooses not to produce the good in the first place.
Instead, in order to achieve allocative efficiency, the Singapore government has to intervene
through non-market based policy to directly provide public goods like national defence though
MINDEF, police services (SPF) and civil defence (SCDF) in order to achieve domestic
stability, and at the same time ensuring there is positive business confidence in Singapore.

Any other potential sources of market failure (explain using economic framework and
accompanied with real life examples within the Singapore context)
Conclusion:
Make a stand regarding the effectiveness of encouraging competition in correcting market failure
and achieving allocative efficiency in Singapore. More specifically, encouraging competition can
only be applied to market failure arising from market dominance and only in non-natural
monopolies.
There are other forms of market failure in Singapore that cannot be corrected with the
encouragement of competition.
As Singapore is an open economy, Singapore firms would be exposed to foreign firms
penetration and hence, increased international competition, making the case for control of market
domination less important for Singapore, hence introduction of competition by the CCS is not the
main and most significant form of government intervention to achieve allocative efficiency in
Singapore.
On the other hand, direct provision of public goods and subsidies in merit goods market failure
could be argued to be more effective at achieving allocative efficiency. For egg. Public goods
such as National Defence and merit goods such as education, healthcare and public housing
provision takes up a sig. proportion of Singapores budget either through direct provision or
subsidies.
The intervention in public and merit goods also serves as a building block in which the
government can achieve internal stability and create a more business-friendly environment to
continue to encourage foreign direct investment (FDI) into Singapore.
Mark Scheme:
Level
L1

Descriptors
Answer fails to address the question.
Answer is mainly irrelevant.
Answer that shows some knowledge of the concepts but does not show that
the meaning of the question is grasped.

Marks
1-9

L2

Attempt to show a balanced answer i.e. whether AE can be achieved through

encouragement of competition but explanation may not be sufficiently
developed.

10 - 16

Egg. Explanation of why government intervenes for reasons other than market
dominance (i.e. other sources of market failure), but analysis lacks rigour.
Some reference to Singapore context is provided.
L3

Well-developed two-sided argument that is able to examine the extent to which

introduction of competition achieves AE in Singapores context.
Candidates are also able to analyse the different causes for government
intervention in the Singapore context as well as the use of alternative policies
to resolve these other sources of market failure.
Good use of economic framework and supported with relevant examples and
clearly illustrated diagrams.

E1
E2

Unexplained judgement or not supported by economic analysis.

Evaluative discussion based on economic analysis.

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1-2
3-4

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