JC Economics Essay Series #57 – Congestion & Merit Goods

JC Econs Essay Congestion & Merit Goods Model Answers 

Being one of the most severe forms of market failure in Singapore, you are highly advised to prepare for the context of excessive driving, ie congestion, a as a form of negative externality in consumption.

Also, prepare in advance, your preferred choice of public goods, including national defence, public warning systems, and street lighting, etc. For such goods that are both non-excludable and non-rival, very few exist in the real world. And not to forget your preferred choice of merit goods as well.


(a) Explain why a policy of indirect taxation may not be the best policy to deal with the market failure generated by excessive driving. [10]
(b) Assess the view that public goods and merit goods should be the major causes of government intervention within Singapore. [15]


JC Econs Essay – Congestion: Negative Externality in Consumption.

Suggested Answer: Part (a)

Part A Essay Answer
Define market failure: According to Wikipedia, it is defines as a situation in which the allocation of goods and services by a free market is not socially efficient, often leading to a net loss of economic value, aka deadweight loss or welfare loss.

Explain congestion as a negative externality in consumption.
(sketch diagram to show divergence private and social costs)

Explain how taxes work to reduce Market Failure in the context.

Highlight at least 2 limitations of tax measure.



JC Econs Essay – Merit & Public Goods in Singapore


Part B Essay Answer
Thesis 1: The Singapore government has to intervene to provide public goods such as national defence, police services and civil defence in order to achieve domestic stability, and at the same time ensuring there is positive business confidence in Singapore.

Thesis 2: The Singapore government also has to intervene in the provision or subsidisation of necessities that have been deemed merit goods such as basic healthcare, education, sanitation and public housing, as these serve as a foundation for further economic development.



Antithesis 1: Tackling market failure arising from externalities, in particular negative externalities, should be the major cause of government intervention due to the long-term impact of prolonged damage due to pollution as well as the immediate negative impact of a serious traffic congestion issue.

Antithesis 2a: Economic growth should be the major cause of government intervention as it ensures Singapore continues to enjoy economic progress, and this done through an emphasis on research and development (R&D, industrial development, a business-friendly tax structure and a fair legal system.

Antithesis 2b: There are other more pressing macroeconomic goals such as high inflation or unemployment rates in the short run that requires the government’s immediate attention at times.
(Qn: is it a good idea to highlight macro goals?)

Antithesis 3: Unequal distribution of income should be the major cause of government intervention as the income gap continues to grow, which reduces the relative purchasing power of the lower income groups and creating a strong cause for tension within society.
(Is this a very serious problem in Singapore?)


Evaluation (siding with thesis)
1. The share of the fiscal budget dedicated to resolving public goods and merit goods market failure is sizeable; national defence takes up the single largest expenditure while there is also significant expenditure for education, healthcare, police force (home affairs) and public housing. Hence, this shows that the market failure of public and merit goods is indeed a major cause of government intervention.

2. Even the problem of unequal distribution, while often mitigated by short term transfer payments, is usually better resolved via government intervention in merit goods like education, healthcare and public housing through subsidising the lower income groups. Hence this still adds support to the assertion that public and merit goods are the major causes of government intervention.


Evaluation (siding with antithesis)

1 However, we may argue that it is through the resolution of public and merit good problems, that the government achieves it longer term objective of economic growth. The intervention in public and merit goods is merely to serve as a building block in which the government can achieve internal stability and create a more business-friendly environment to continue to encourage foreign direct investment (FDI) into Singapore.



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