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 but given their opposing effect on govt. COE revenue, the net impact is arguably indeterminate. *Note: possible for candidates to raise other Thus regardless of the reason behind the  in COE prices, an  in COE prices will  the COE revenue of the govt. *Note: possible for candidates to raise other combinations of DD & SS shifts that result in an  in COE prices, as long as it is accompanied by sound economic analysis.

William Tan v. 23 Aug 2015 combinations of DD & SS shifts that result in an  in COE prices, as long as it is accompanied by sound economic analysis. E.g. it is possible for students to account for the large  in COE prices with an  in DD >  in COE supply. Evaluation (or could be part of analysis above) However, given the strong economic growth in Singapore & the steady  in population due to her open labour immigration policies, it is more likely that the  in DD outweighed any  in COE supply. As seen in the figure above, the large  in COE demand compared to the  in COE supply es the govt. COE revenue from area 0Q 0AP0 to 0Q1BP1. The extent of  in govt. COE revenue is likely to be large given the price inelastic demand and supply of COEs. As seen in the figure above, the large  in COE prices due to an  in price inelastic demand & a  in perfectly price inelastic supply results in a large  in govt. COE revenue from area 0Q 0AP0 to 0Q1BP1. Impact on Expenditure on Different Types of Cars Link between COE prices & new cars In Singapore, COEs are often bundled together with t he sale of a new car. Hence COEs form a part of the cost of supplying a new car. Hence an  in COE prices will lead to a  in the supply of a new car. Diff. Types of Cars New Cars with PED < 1 New Cars with PED > 1 Impact of  in COE price on expenditure In Singapore, cars below 1600cc are typically mass market cars (such as the Toyota Corolla) with relatively more affordable prices. Those who purchase such cars typically have a greater necessity for such cars due to reasons such as being physically challenged or due to a frequent need to travel on the job, such as for those in sales related jobs. Given the necessity of a car to them, their demand for new cars may be price inelastic. Hence when supply of such new cars , there will only be a less than proportionate  in quantity demanded for them, resulting in an  in expenditure on such cars. In Singapore, cars above 1600cc are typically luxury cars (such as BMWs & Mercedes) with relatively less affordable prices. Such luxurious models are typically not a necessity and given the relatively high proportion of income their prices command, the demand for such new cars is likely to be price elastic. Hence when supply of such new cars , there will be a more than proportionate  in quantity demanded for them, resulting in an  in expenditure on such cars. * Note: Candidates need not discuss in terms of cc. Can be simply brands of cars with diff. PED. Evaluation Given the sharp  in COE prices, the extent of  in supply of new cars is likely to be significant, resulting in a significant  in expd on non-luxury cars but a significant  in expd. on luxury cars. * Any other reasonable analysis or evaluation is acceptable too. * A diag. is not required given the relative simplic ity of the analysis and assuming a sufficiently clear analysis of the impact on expd. Impact on Expenditure on Different Types of Cars (Another Possible Alternative Analysis) Diff. Types of Cars New Cars Used/Resale Cars Impact of  in In Singapore, COEs are often bundled together Used ca rs are a substitute for new cars. Hence the D0 S1 S0 Q0 Q1 P1 P0 Price Qty.0 B D1 A D1 D0 S1 S0 Q0 Q1 P1 P0 Price Qty.0 A B

William Tan v. 23 Aug 2015 COE price on expenditure with the sale of a new car. Hence COEs prices form part of the cost of supplying a new car. Hence an  in COE prices will lead to a  in the supply of a new car & hence an  in the prices of new cars. Given the high COE prices, cars in Singapore typically cost above 100K even for the non- luxurious models. Hence their prices are a significant proportion of income. Furthermore, they are typically not a necessity due to the well-developed public transport system in Singapore. Thus the demand for new cars is price elastic. Hence when price of new cars , there will be a more than proportionate  in quantity demanded for them, resulting in a  in expenditure on new cars.  in price of new cars will lead an  in demand for used cars. Ceteris paribus, this will lead to an  in both the equilibrium price & quantity for used cars. Hence expenditure on used cars will . (Not suitable for exam conditions. FYI only) Furthermore, as prices of new cars climb, existing car owners would want to hold on to their cars longer and not sell their cars, leading to a  in the