H1 Essay Question 3 Answers

H1 Question 3 a) Explain, using examples, what is meant by public goo d and demerit good. [10] Singapore did not fare well in three areas - availability, affordability and quality of pre- school services. The Lien Foundation called for pre-school education to be provided free for all children nationwide. Adapted from Straits Times, 21 July 2012 b) Discuss whether Singapore government should take char ge of preschool education, and offer it free to all children. [15] __________________________________________________________________ Suggested Answers: Part (a) Public goods refers to goods or services that are non-rivalry and no n-excludable in consumption. • A good is non-rival in consumption if one person’s con sumption of the good does not reduce the quantity available to another person. Because of this, once a public good is provided, the marginal cost of providing the good to an additional user is zero. With zero margina l cost, the basic principle of optimal resource allocation calls for provisi on of public goods and services at zero price or no charge. However, if the price is zero, no firm would want to supply the good. • A good is non-excludable in consumption if it is diff icult to exclude non- payers from enjoying the good. This gives rise to a fre e rider problem. Since non-payers can also enjoy the good, no one would be willing to pay for it. As a result, demand is concealed and difficult to estimate. With no price and marginal cost, this leads to zero production r esulting in complete market failure. • Examples of public goods are street lighting and floo d control. Once street lighting is provide, it does not get any dimmer just because another person is consuming it. It is also difficult to prevent the no n-payer from enjoying it once the streets are lighted up. Demerit goods are socially undesirable goods or services that generate negative externalities, and that the government feels people have over- consumed them. • Demerit good is rivalrous in consumption as one person’ s consumption of the good reduces the quantity available to another p erson. It is possible to exclude non-payers from enjoying the good and therefo re, it is excludable in consumptions. Consumers are willing to pay a price for it.

• Given that the nature of the demerit good is rival rous and excludable in consumption, the private companies provide them. Free-ma rket provision of demerit goods therefore leads to overconsumption and partial market failure. • The marginal social cost from undertaking the activity i s the marginal private cost faced by the smoker as well as external costs accr uing to third parties. Negative externalities will lead to divergen ce of private cost and social cost. With the presence of negative externalities, marginal social cost will be greater than marginal private cost. If ciga rettes were provided through the free market, social costs of smoking exceed the private costs. Private optimum occurs at Qm where MPB (the benefit to the individuals of smoking the last unit of cigarette) equals MPC (the cost to the individual of smoking the last unit of cigarette). Level Description Marks L3 Well-developed explanation on the features of bot h “public good” and “demerit good” with good use of relevant, supporting examples. 7-10 L2 Ability to explain in terms of rivalry and excluda bility of 5-6 Qs Q m Quantity Price D = MPB = MSB S = MPC MEC Es Em A 0 MSC

public and demerit good with some use of relevant examples. L1 Mere listing concepts of public and demerit goods. Some conceptual errors. 1-4

b) Discuss whether Singapore government should take charge of preschool education, and offer it free to all children. [15] Introduction • Market failure occurs for merit goods because the price mechanism only takes into account private benefits and costs and thus there is diverg ence between private benefits and social benefits by the amount of external benefits. At the market equilibrium where marginal private benefit equals marginal private cost (e.g. school f ees and forgone earnings), there is an underconsumption/ underproduction of higher education. • Many parents in Singapore introduce their children to formal or partial education from a very young age. Pre-school education can be considered a merit good (i.e. a good with positive externalities or external benefits e.g. society as a whole benefits when higher productivity and real growth in gross national product rises with a better-educated work force). Body Thesis: Yes. Direct free provision by the government in the market of pre-school services improves the allocation of resources. Therefore, the government should fully take charge of the provision of pre-school services. (I) Direct Provision • The government have built and provide pre-school e ducation e.g. PAP Community Foundation (PCF) which provides kindergarten and ch ildcare services to supplement the amount that the market provides. This is to enhance the well-being of the community by providing quality educational services at affordabl e cost, as well as through welfare and community services. Such services can be provided f ree or at a subsidised rate determined by the government. • To provide pre-school education for free, it means that government would have to provide full funding for the cost of provision. Compared to the free market equilibrium, if the government can directly provide pre-school educatio n services for free, the consumption of pre-school education will increase from OQ p to the socially optimal level OQ s. In addition, it may help to level the playing field for kids from l ow or middle-income families, as the fees will be made lower and made more affordable for all pre-schoolers. • However, the market may consume beyond the sociall y optimal level OQs. MPC = MSC Quantity Cost, benefit 0 MPB Qm MSB = MPB + MEB Q MPC + subsidy Subsidy

Evaluation: • The government will provide some merit goods for f ree because the marginal social benefits far outweigh the private benefits for example, compulsory free vaccination against smallpox, measles etc. For pre-school education, the governme nt will not provide all of them for free because the private sector will produce them due to the characteristics of excludability and rivalry in consumption. • Second, there is an opportunity cost in using the limited government funds. It is becoming apparent that to continue to provide good quality p re-school education, the government cannot solely depend on state resources. Limited re sources available for government funding of pre-school education as the government n eeds to cope with competing demands arising from other areas like national defence, health care and social welfare. • Third, there may be overconsumption as consumers w ill maximize their satisfaction by consuming up to the point where marginal benefit = 0. This would lead to increased taxes to fund the additional expenditure, which may arise if pre-school education services are provided for free. Anti-Thesis: No. The presence of government in the market for pre-school services may not improve the allocation of resources. The govern ment should not fully take charge of the provision of pre-school services, as there are other strategies such as providing government subsidies and regulation which are more suitable in improving efficiency in resource allocation of merit goods. Currently, there are two anchor operators in Singapore - the PAP Community Foundation (PCF) and NTUC My First Skool. The government could work hand-in-hand with the private sector in encouraging the setting up of pre-school centres. H owever, with more pre-schools that charge higher school fees, education is turning into