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H2 Econs [Market Failure] The High Prices of Cars in Singapore

Updated: Mar 4, 2022

Are Cars in Singapore a Distant Dream?

Cars. Everyone dreams of having one. However in Singapore, you are the furthest you can possibly be from the dream of car ownership. Why are cars so damn expensive to own and drive here?

1. Cars create the classic case of Market Failure

Cars are expensive in Singapore due to the numerous government regulations that exist to make it costly to buy a car to discourage car ownership. A high population of car owners translates in a high degree of private car usage, causing substantial traffic congestion and significant air/noise pollution. We call these effects negative externalities (MEC) in economic parlance, which are spillover costs that affect third parties not directly involved in the consumption/production of a good or service (in this case, anyone who is not driving). Congestion reduces productivity and efficiency of workers and companies; employees arrive at work late, deliverymen cannot make as many deliveries in a day and logistical networks get choke up that reduces the output of that industry (think about how many more parcels Zalora/Aliexpress can send to you in a day!). Air and noise pollution increases the healthcare burden on society due to the various associated illnesses for those who live near busy roads. In all, market failure occurs because there is more car usage than society would like, leading to overconsumption (MSC > MSB) and a deadweight loss to society. To be clear, it is not the ownership of cars themselves that cause issues, but rather the usage of them.

2. COE - The 3 Most Hated Letters by Car Owners

One of the most effective tools to combat car usage is the Certificate of Entitlement (COE), a de facto quota system that restricts the number of cars that can be bought or sold in a given month. Prices on the COE are a function of the supply (dictated by the government) and the demand for cars. The quota + pricing system of the COE restricts the amount of car ownership growth in Singapore, and so puts a cap on the number of vehicles that would be on the road. This leads to a lower demand (shifts MPB left) for car usage, which eases the market failure and reduces the extent of overconsumption.

3. ERP - The Next Most Hated Letters by Car Owners

The electronic road pricing (ERP) system serves as an indirect tax on car usage (some might argue that its a direct tax on consumers, but for simplicity lets assume it shifts MPC). ERP gantries are placed around major roads around the island to ease congestion during peak hours. The ERP, which is essentially like a tax, discourages road usage during certain hours by increasing the cost of using the road, forcing road users to internalize the external costs (the incremental congestion that they create) created by their car usage. This again eases the market failure and reduces the extent of overconsumption.

4. It's Not All Bleak - Why Public Transport is Crucial

While Singaporeans bemoan the fact that a car is seemingly out of reach, it is necessary to consider that the key purpose of a car is for transport. Aside from prestige and vanity, the main motivations for car ownership are convenience and comfort. The Singapore government has done a commendable job in building a public transport system that stands on par or even better than most major metropolis around the world. Our MRT system is known to be one of the cheapest and best ways to get around the island. For comparison, a 10-min Tube ride in the London Underground costs almost 3x that of what it would cost you in Singapore. As we build a better public transport network, not only do non-car owners get a convenient and comfortable mode of transport, it could further reduce the demand for car usage as more people switch away from buying cars to taking public transport. Globally, a greater reliance on public transport and even ride-sharing has gained traction as people become more environmentally conscious and city transport systems get better. This can only further aid the reduction of demand for car usage and alleviate the corresponding market failure.

5. Conclusion

Ultimately, it is impossible to fully eliminate externalities in the market for car usage; as long as there are cars, there would be congestion and pollution. But a combination of effective policies go a long way in reducing the extent of externalities generated, eliminating market failure and increasing social welfare. Our cars are expensive; but would we rather our congestion be so bad that our drivers must mount the curb to overtake all the time?

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