(a) Market failure occurs when the free operation of the price mechanism is unable to allocate resources optimally. When market failure occurs, society’s welfare is not maximised as marginal social benefit is not equal to marginal social cost. Market failure can occur in the case of public goods and due to imperfect information.
Public goods are goods that possess the characteristics of non-excludability and on-rivalry in the consumption of such goods. Non-excludability means that once a good is provided, it is impossible or prohibitively expensive to exclude someone from consuming the good even if he does not pay for it. In the case of the lighthouse, it is not possible to prevent a ship from using the light from the lighthouse for navigation even if the ship did not pay for it. Non-rivalry means that the amount of the good available for consumption by others does not diminish even after a person has consumed it. For instance, the consumption of the light from the lighthouse by one ship does not reduce the amount of light available for other ships to consume in the same vicinity. Due to the characteristic of non-excludability, all consumers want to be free-riders as even non-paying users cannot be excluded from consuming the good. Hence, no consumers will want to pay for the good and demand is thus concealed and preference unrevealed. Due to the characteristic of non-rivalry, the supply of the public good is not depleted by an additional user. Hence, the marginal cost of production for the public good is zero. Based on the condition for allocative efficiency where price equal marginal cost, the price charged for the good must also be zero. Thus, the market fails as it is impossible to charge a market price achieving allocative efficiency for the public goods. The free market breaks down completely due to non-production of public goods as it fails to allocate resources to produce public goods despite the existing demand. Imperfect information refers to situation whereby producers and consumers do not have complete knowledge of the market in which they are making economic decisions. For consumers, they may not be fully aware of the exact private benefit derived from the consumption of good. In the case of education, consumers perceived private benefit will include better knowledge, higher education qualifications, and better employment opportunities. However, it is difficult to accurately quantify possible better employment opportunities and better knowledge, etc. This may lead to an underestimation of the actual private benefit, as illustrated in the diagram below. When left to the free market, consumers will consume at Qp, considering their perceived marginal private benefit (MPBperceived) and marginal private cost (MPC). However, there is a divergence between the perceived MPB and actual MPB. Assuming absence of externalities, there is an under-consumption of education as the optimum level of consumption occurs at Qs, where MPBactual = MSB = MSC, leading to market failure.
Likewise, consumers can also be overestimating their private benefit. In the case of cigarettes consumption, consumers may not be fully aware of the true health consequences and the severity of the negative health impact. This overestimation will lead to an over-consumption of cigarettes, leading to market failure. On the other hand, producers likewise will consider their perceived private benefit and cost for their decision on production level. They may also be unaware of the actual private cost due to lack of perfect information, such as market opportunities, costs of production, and activity of competitors. For example, due to lack of perfect information of the demand of fishes and the fish population data in the fishing area, it is extremely difficult for the fishermen to gauge the most optimum level of fishing. If they overfish, it will lead to wastage, potential decline in profits due to lower price per fish, and decline in fish population which will hurt their future livelihood. On the other hand, if they fish below the optimum level, they will be losing out on potential revenue as there is excess demand. Market failure hence result from the overproduction and underproduction respectively. In conclusion, both public goods and imperfect information can cause markets to fail. However, it is easier to identify market failure due to public good than imperfect information. This is because the free market breaks down completely in the case of public good resulting in zero production whereas imperfect information ‘only’ results in the over or under production of the good, whose extent is less easy to agree on. (b) The government of Singapore has adopted alternative policies to solve the market failure arising from public good and imperfect information. These include government provision and privatisation for public good and provision of information and facilitate flow of information for imperfect information.
As explained above whereby market fails in the case of public goods due to zero production of the goods, the government can step in and provide the goods instead. For instance, the government can produce the streetlights since the free market will not produce it at all. The government will produce it at the socially optimal level in order to achieve allocative efficiency and maximise society’s welfare. The cost of the production can be financed through taxation. However, it is unlikely that the market failure will be completely eradicated as the government may misestimate the society’s optimal level of streetlights consumption leading to under or over production. Furthermore, there will be productive inefficiency as the government is not a profit maximising organisation. The bureaucratic red tapes compounded by the possible lack of knowledge for the production will lead to inefficiency and wastage of resources. The wasted resources could have been put to alternative use such as other important development projects. Hence, government provision may also lead to a misallocation of resources. In order to achieve provision of the good more efficiently, the government can also privatise the industry as long as a method of excluding free-riders can be identified. For instance, while roads and highways may seem to be a classic case of public good, it is actually possible to exclude motorists from using the road if they do not pay for the road tax. In Singapore, the Gardens by the Bay have been constructed by the private sector despite it being deemed as fulfilling the characteristic of public good. The government provided the funding for the production and part of the garden (the conservatories) has been developed such that admission tickets are required to enter. This allows production of the public good by producers as there are profits to be made. Furthermore, the efficiency of production is expected to be greater than the government and the public can enjoy majority of the garden free. It is, however, not possible to opt for privatisation in the event whereby it is completely impossible to exclude free-riders from consumption or when national interest and security are at stake. For example, national defence has been solely undertaken by the government due to the above two reasons. In the event of a threat, it is impossible to defend only the people who have paid for the service. Furthermore, national defence is vital to the peace and stability of the country. This should not be placed in the hands of profit maximising firm. In the case of imperfect information, the government can make information available for consumers and/or producers in order for them to be aware of the true private benefit and cost. Firstly, this can be done through public education and campaigns to raise awareness of the actual benefit and cost. For instance, Health Promotion Board has been actively raising awareness of preventive healthcare benefits in order to reduce under-consumption of healthcare due to underestimation of MPB. The increased awareness of the actual benefits will lead to consumers revising upwards their MPB, ideally to the level of the actual MPB. This will lead to consumption of healthcare increasing from Qp to the socially optimal level Qs. Secondly, the government can also impose rules and regulations for producers to disclose accurate information about their products. This can be done by enforcing accurate labelling and informative advertising instead of persuasive advertising. For example, all pre-packed food products must be labelled according to the requirements of the Singapore Food Regulations, including information on ingredients used and nutrition. Also, cigarettes are also required to have health warning labels on their packaging. This allows consumers to make informed decisions that are based on accurate and reliable information.
However, especially for public education and campaigns, it may be costly for the government to implement such policies nationwide as they must be adopted consistently over a long period of time for the effects to be seen. There are also significant costs associated with monitoring and enforcement of rules and regulations imposed. Furthermore, even though information may be made available, the success of the government efforts is still dependent on the receptiveness of the public to the messages delivered. In certain instances where traditional beliefs are very strong, government’s effort to change the mindset of the people may prove very challenging. Instead of direct information provision, the government can also facilitate the increased flow of information. This can be done by promoting literacy, constructing more schools and education facilities, providing incentives to producers to improve Information Technology (IT) infrastructure, and improving the telecommunication infrastructure. This allows information to flow more efficiently to a larger pool of people and also ensures that the population will be able to take advantage of the improved information flow with higher education level. For example, Singapore has announced the ‘Smart Nation’ vision in 2014 of making use of technology to improve lives and business. This include providing greater access to real-time transport information so that commutes can better plan their journeys and discover more efficient travel routes, potentially achieving time savings and reduce traffic congestions. However, there is again opportunity cost incurred for efforts to facilitate the flow of information and funds spent on infrastructure construction and improvements are hefty. Efforts to facilitate flow of information are also not immediate and results can only be felt in the long term. The success of the above is also dependent on people’s demand and preference for information as the government is not actively promoting the spread of specific information but rather is allowing information to flow more freely as a whole. Thus, it increases the proliferation of both desirable and non-desirable information. In conclusion, numerous policies exist and are implemented by the Singapore government to correct the market failure arising from public good and imperfect information. Thus far, the government has considerable success in correcting the market failures as the government is flexible in the policy implementation and will aim to tackle the root cause of the problem. This is crucial for the effectiveness of policies implementation as there is no one size fits all policy. For the Singapore government, cost of policy is usually less of an issue due to her constant fiscal surplus. All attempts by the government are, however, subjected to government failure as it is always difficult to estimate the exact output to maximise society’s welfare as government suffers from imperfect information as well. This is compounded by the bureaucracy and inefficiency which further limits the success of government intervention. Over time, the extent of intervention required by the government will likely reduce as technological advancement will allow exclusion of free-riders in public goods more possible and improves information availability and access. |
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