(a)South-East Asian cities have seen an increase in demand for private car as many of them have experienced strong economic growth. This increases the income of the population which leads to an increase in their purchasing power. As ownership private car is a luxurious/ normal good, the demand for private car increases as the income level increases, leading to high demand for private car use.
Furthermore, consumers have strong preferences for car ownership. This is mainly due to the convenience that private transport offers along with the changing perspective that cars are a necessity. This also increases the demand for private car, leading to high demand for private car use. (b) (i)UK passenger transport use of buses has generally decreased throughout the years from 1952 to 2010 while both usage of rail and cars have generally increased for the same period.
The increase in cars usage is significantly greater than the increase in rail usage, with a more than tenfold increase in car usage compared to only a near twofold increase in rail usage. (b) (ii)During the period 2007 – 2010, passenger transport saw a generally constant bus usage, a gradual increase in rail usage, and a general decrease in car usage.
The above trend may be accounted by changes in relative prices. With reference to Table 2, the cost of running a car saw the sharpest relative increase by 17.4% compared to bus fares and rail fares at 8.8% and 9.8% respectively. This greater relative increase in price of car usage will lead to a fall in quantity demanded of car usage. As such, passengers may switch to rail transport as they are substitutes of each other. Hence, the demand of rail usage will increase, which is in tandem to the trend observed above. However, contradicting to the above analysis, bus usage did not increase despite its fares increasing by the least proportion. This suggests that relative prices may not be the only influencing factor and that there are other factors affecting the passenger transport usage. Furthermore, since there is an increase in price for all modes of transport, there should be a decrease in usage for all modes of transport as quantity demanded will decrease given an increase in price according to the law of demand, ceteris paribus. The extent of decrease would likely be the greatest for car usage, followed by rail and bus. However, this is also not observed in the trend above. The above discrepancy may be reconciled by two main factors. Firstly, the price elasticity of demand will affect passengers’ behaviour significantly. The demand for private car ownership is expected to be price elastic since it constitutes a large proportion of income and there are much less expensive substitutes available, including bus and rail. The demand for public transport is price inelastic (according to Extract 5) as it can be considered a necessity since passengers require the usage of it to travel to work, school, etc. As such, when the price of car usage increases, the quantity demanded will fall more than proportionately. This is in contrast to the less than proportionate decrease in quantity demanded given an increase in price for public transport. As some of the passengers still require the usage of transport, they will switch from car to rail. This effect for the increase in demand for rail will be more significant than the increase in price, leading to an ultimate increase usage of and quantity demanded for rail. Secondly, consumers’ taste and preferences also play a huge role in their choice of transport. Consumers may have higher preference for rail usage than bus usage due to convenience and efficiency of the rail transport. As such, when they abandon private car ownership and switch to public transport, more may opt for rail usage instead of buses, leading to an increase in rail usage and a constant level of bus usage. In conclusion, the changes in passenger transport usage can only be minimally explained by the changes in their relative prices. Other factors and perspectives must be considered for a comprehensive understanding of the trend observed. (c) (i)The price elasticity of demand (PED) for bus travel measures the responsiveness of the quantity demanded of bus travel given a change in its price.
An absolute PED value of below 1 indicates that the demand for bus travel is price inelastic, i.e. a change in price of bus travel will lead to a less than proportionate change in the quantity demanded of it. For example, a 10% increase in price of bus travel will lead to only a 4% decreases in quantity demanded given the PED value of (–) 0.4. (c) (ii)Subsidies granted to public transport will lower the cost of production for producers. This cost saving can encourage producers to continue with their inefficient practices and reduce their incentive to improve efficiency as their profit margin is protected. As such, consumers will not benefit as the subsidies granted is not passed down in terms of lower fares or improvement in quality of service.
Furthermore, even if the cost saving is passed down leading to a lowering of transport fares, the quantity demanded for public transport will only increase less than proportionately as its demand is price inelastic. For people without private transport, public transport is a necessity; for people with private transport, they prefer private transport strongly due to its convenience. Hefty government funds may be incurred resulting in only a small increase in consumption, which is hardly justifiable due to the opportunity cost incurred as the funds could have been channelled into other uses. Hence, a policy of subsidising public transport may do little to help increase the quantity demanded of it or encourage people to switch from private to public transport. It will also not be effective in reducing negative externalities causes by private transport. (d)Negative externality is the cost borne by third party who is not directly involved in the production and consumption of a good and such costs are not reflected in the price of the product. With reference to Extract 1, a negative externality occurs when there are too much vehicles on the roads leading to massive congestion.
The private costs for car ownership include petrol cost, insurance, taxation, and maintenance fees. In this case, However, there are also costs to third party, known as external costs, which includes Jakarta residents’ lowering quality of life due to stress associated with congestions and also worsening environmental conditions caused by pollution. The existence of external cost due to negative externality will lead to a divergence of the private and social costs since social cost is the total of private and external cost. (e)As discussed in part (d), negative externalities resulting from unlimited use of private transport will lead to a divergence in the private and social costs of private transport usage. Assuming that there is no positive externality, the existence and impact of negative externalities can be illustrated in the diagram below.
With reference to the diagram above, motorists will consume at Qp as they will only take into account their marginal private benefit (MPB) and marginal private cost (MPC). This is not the socially optimum level at Qs, where marginal social benefit (MSB) is equal to marginal social cost (MSC). As Qp is greater than Qs, market failure occurs due to overconsumption along with the associated welfare loss. There is a need for the government to implement policies in order to achieve a more efficient allocation of resources.
One way in which the government can reduce overconsumption is through taxation on items such as car registration, car ownership, and fuel or imposing parking and congestion charges (Extract 4). The taxation and charges imposed will ideally correspond to the marginal external cost (MEC) in order to force consumers to internalise the negative externalities generated. With reference to the above diagram, this will shift MPC upward to coincide with the MSC. Hence, motorists will reduce their consumption from Qp to Qs, which is the society’s optimum level. This incentive-based policy encourages motorists to change their behaviour towards the socially efficient level. Furthermore, the revenue collected by the government can be used to fund alternative initiatives to curb of the problem of overconsumption, such as building better transport network and infrastructures. However, as mentioned in Extract 4, government failure will inevitably arise due to imperfect knowledge. The size of the taxes and charges to impose is difficult to determine because it is hard to define external cost in monetary terms. Thus, the outcome of motorists consuming at the socially optimum level is unlikely and resource allocation will still not be efficient. Nonetheless, the policy should shift consumption at Qp closer to Qs, improving efficiency. Another way to reduce motorists’ overconsumption is to implement command- and-control (CAC) policies, such as vehicle emission and fuel standards in the US and driving or parking restrictions in Singapore, according to Extract 4. Motorists who do not comply with the regulations set will be prosecuted. The restrictions imposed again shift MPC towards MSC, reducing usage of private transport and leading to a more efficient allocation of resources. CAC regulations are low cost to implement (Extract 4) and are thus the preferred option. The government is also able to respond swiftly and effectively should the standards set not be abided. However, the regulations implemented may not be able to achieve an optimum allocation of resources due to difficulties associated with the optimum level of restrictions to set, such as vehicle emission permitted and driving restrictions. Furthermore, there is also opportunity cost incurred as funds channelled towards monitoring and enforcement could have been allocated for developmental purposes such as transport network improvements instead. The government can also enhance public transport to encourage motorists to switch from private to public transport, according to Extract 2 and 5. By improving the public transport system, passengers will be more willing to adopt public transport as their main mode of transport instead of private transport as it becomes a closer substitute with similar convenience and efficiency at a significantly lower cost. This will increase the demand for public transport and decrease the demand for private transport, reducing motorists’ consumption of private transport and achieve a more efficient allocation of resources. By switching to public transport, this will reduce traffic congestion and pollution. Beyond being able to satisfy increasing travel demands, a better public transport system will also yield many benefits such as time savings for passengers without personal vehicle, better residential property values, reduced fuel usage, and tourism. However, its success is difficult to achieve as it takes time to improve the public transport system. Also, people have strong preferences for private car ownership (Extract 2) due to its convenience. This is further compounded by public transport having characteristics of inferior goods (Extract 5), where demand for it decreases as purchasing power increases. Therefore, the challenge lies in the government’s ability to change people’s mind-set on public transport. In conclusion, considering each policies individually, the problem of negative externalities seems to be best solved by imposing taxes and other charges on motorists as it forces their behaviour to move towards the socially optimum level and is considerably easier to implement with effects immediately observed. However, in order to be truly effective, a combination of all policies mentioned above is vital to allow passengers to continue satisfying their transport needs without any inconveniences in the short run. In the long run, improvements to the public transport system together with the reduction in congestion will not only solve the problem of negative externalities identified above but will also improve passenger’s convenience and quality of life. |
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