HCI_H2_ECONS_Q2

William Tan v. 23 Aug 2015 Q2 The government collects revenue from sale of Ce rtificate of Entitlement (COE). There have been large increases in the COE prices for cars in Singapore over the past few years. Discuss the likely effects of higher COE pri ces on government revenue and expenditure by consumers on different types of cars. [25] INTRODUCTION The effects of the large rise in COE prices can be an alysed using the demand-and-suppl y framework. Demand refers to the quantities of a good that consumers are willing and able to purchase at each possible price during a period of time, ceteris paribus, while supply refers to the quantities of a good that producers are willing and able to offer for sale at a given set of prices during a period of time, ceteris paribus. Consumer expenditure is the value that consumers spent on a particular good or service and is measured by equilibrium price multiplied by equilibrium quantity in the market. BODY Impact on Govt. Revenue PES = 0 COE Supply COE supply is a quota decided by the govt. independently of prices. Hence it is has perfectly price inelastic supply. PED > or < 1 COE Demand (PED > 1) (preferred) COE prices in recent years are typically more than 50K and are a high proportion of the average income in Singapore. Hence the demand for COEs is likely to be price elastic. OR COE Demand (PED < 1) (own figure rule) Purchasing a COE is a regulatory requirement for those who wish to purchase a car. Given this is a necessity, the demand for COEs is likely to be price inelastic. Large  in COE prices due to SS  Thus if the  in COE prices is due to a  in COE supply, there will be a more than proportionate  in quantity demanded for COEs, leading to a  in COE revenue of the govt. The  in COE supply could be due to relatively low vehicle deregistrations & a lower vehicle growth rate to curb congestion. Thus if the  in COE prices is due to a  in COE supply, there will be a less than proportionate  in quantity demanded for COEs, leading to an  in COE revenue of the govt. Large  in COE prices due to DD  If the  in COE prices is due to an  in COE demand, the market eq uilibrium quantity will  too. Hence there will be an  in COE revenue of the govt. The  in COE demand is largely due to an  in incomes & an  in population in Singapore. COEs are normal goods, hence an  in income would lead to an  in the demand for COEs. An  in population will cause the number of consumers to  in the market for COEs, causing an  in the total COE demand. If the  in COE prices is due to an  in COE demand, the market equilibrium quantity will  too. Hence there will be an  in COE revenue of the govt. Combined Effect Hence the effect of an  in COE prices on govt. COE revenue depends on if it was a demand or supply factor causing it. However it is more likely that the  in COE prices is due to both factors bu