TPJC H1 ECONS CSQ1 ANS

H1 CSQ 1 Suggested Answers (a) Using the data from Fig. 1, summarise how the price of COE had changed from March to December 2016. [3] General Trend: Overall, the price of COE had increased from March to December 2016. [1] Distinct Segments: The price of COE had gradually i ncreased from March to June 2016 [1] before prices declined stead ily from July to December 2016. [1] (b) With reference to Extract 1, use supply and demand analysis to explain the likely impact on the price of COE. [5 ] The price of COE is determined by the forces of supply and demand for COE. Demand factor As mentioned in Extract 1, with Uber and Grab sourc ing for new vehicles to be on the road coupled with minimal gov ernment intervention on 3 rd party apps, the demand for private-hire cars will be on the rise. As the increase in demand for new p rivate-hire cars will require COE, the demand for COE will increase, shifting the demand rightwards from D1 to D2, ceteris paribus. [1] Supply factor Also as mentioned in Extract 1, as COE quota is set to grow, supply of COE will shift rightwards from S1 to S2, ceteris paribus. [1] Justify which curve shifts more COE supply “is expected to rise sharply in 2016 to about 95,000, compared to about 58,000 in 2015” the numbers is expected to increase by almost twice we could justify that supply shifts by a greater extent compared to demand. [1] Diagram Market adjustment process Price of COE Quantity of COE S1 S2 D1 D2 Q1 Q2 E1 E2 P1 P2

At the original price P1, quantity supplied is grea ter than quantity demanded, this leads to a surplus and hence downward pressure on price from P1 to P2 till the surplus is eliminated. [1] Final Outcome Hence, prices of COE falls from P1 to P2 and quanti ty of COE increases from Q1 to Q2. [1] (c) (i) Define price elasticity of supply. [1] Price elasticity of supply measures the degree of responsiveness of quantity supplied to a change in the price of good itself, ceteris paribus. (ii) Using Extract 2, explain how the price elasticity of supply for private-hire cars might have changed with the need for the drivers to apply for a vocational license. [2] As mentioned in Extract 2, the private-hire car dri vers are required to apply for a vocational license where they need t o go through a medical examination, attend a 25 hours course and pass a test. This makes it relatively more difficult for an individual to be a private-hire car driver and may even deter some of the private-h ire drivers who drive to earn a part-time income. [1] Given an incr ease in price, the quantity supplied for private-hire cars increases b y less than proportionate. Hence, the introduction for the need to apply for v ocational license will make the price elasticity of supply for privat e-hire cars to be relatively more price inelastic. [1] (d) (i) Using Extract 3 , explain the economic case for government intervention. [5 ] Identify the source of market failure: Air pollutio n caused by cars generate negative externalities in consumption, which is a source of market failure. [1] Define negative externality in consumption: refers to the costs of consumption, which fall on people other than the co nsumers of the product, for which no compensation is made. Example of negative externality in consumption: Fro m Extract 3: “health and environmental impact of vehicular emissions” reduce the quality of the environment to the community, an d may cause long-term health problems such as lung cancer to ot hers, incurring medical costs. [1]

Elaborate on the source of MF with the aid of a diagram [3m]: In a free enterprise economy, the price mechanism will only consider private costs and benefits, ignoring externalities. To the individual car user, the level of car usage will be at the poi nt where MPB = MPC (private efficiency). Car users do not take into account external costs generated. As such, Qpte is being consumed. H owever, the socially optimal level of output is at Qsoc, where MSC = MSB. At Qpte, the MSC is greater than MSB. One extra unit o f output adds more to society’s costs than to society’s benefits. There is over- consumption of car usage that generates negative externalities, and hence a welfare loss to society occurs, shown by th e shaded area. The market fails because economic efficiency has no t been achieved at Qpte. Link to qn: Hence, the need for g overnment intervention. OR Identify the source of market failure: Air pollutio n caused by Uber and Grab drivers generate negative externalities in production, which is a source of market failure. [1] Define negative externality in production: refers t o the costs of production, which fall on people other than the pro ducers of the product, for which no compensation is made. Example of negative externality in production: From Extract 3: “Extra miles’ worth of pollution being belched into Singap ore’s air every year from a traffic spike fuelled by ride-sharing a pps such as Uber. The lower cost of taking an Uber is encouraging some people to step away from public transport and get into the Uber.” + “health and environmental impact of vehicular emissions” reduce the quality of the environment to the community, and may cause long-term Welfare loss E* MEC MSC O Qsoc Qpte Output Costs / Benefits SS = MPC DD = MPB = MSB

health problems such as lung cancer to others, incu rring medical costs. [1] Elaborate on the source of MF with the aid of a diagram [3]: In a free enterprise economy, the price mechanism will only consider private costs and benefits, ignoring externalities. To Grab/Uber, the level of output will be at the point where MPB = MPC (private efficiency). Grab/Uber do not take into account external costs generated. As such, Qpte is being produced. However, the socially optimal level of output is at Qsoc, where MSC = MSB. At Qpte, the MSC is greater than MSB. One extra unit of output adds more to society’s costs than to society’s benefits. There is over-production of private-hire car service that generates negative externalities, and hence a welfare loss to society occurs, shown by the shaded area. The market fails because economic efficiency has not been achieved at Qpte. Link to qn: Hence, the need for government intervention. (ii) Comment on the effectiveness of rebates for environ mentally - friendly car models in curbing vehicular emissions of pollutants. [6 ] Explain how rebates for environmentally-friendly ca r models curb vehicular emissions: • From Extract 3: “The National Environment Agency i s implementing rebates for environmentally-friendly car models that range between S$10,000 and S$20,000, to nudge car- buyers towards cleaner and more environmentally-fri endly models such as electric vehicles.” • The rebates equivalent to the size of the MEB at Q soc will lead to a fall in the cost of purchasing an environ mentally- friendly car model. This will compensate the consumer for the Welfare loss E* MEC MSC O Qsoc Qpte Output Costs / Benefits SS = MPC DD = MPB = MSB

positive externalities generated. The subsidy encourages the consumer to take into account (internalise) the ext ernal benefits, raising the MPB to be at the same level as the MSB. Faced with the new demand curve, the consumer will increase consumption of environmentally-friendly car models to Qsoc, which is the socially efficient level. Thi s will lead a fall in consumption of non-environmentally-friendly car models and hence a fall in vehicular emissions of p ollutants as consumers switch towards environmentally-friendl y car models which are cheaper substitutes with the rebat es. The welfare loss