JC Econs Essay Positive Externality in Consumption & Housing Full Length Answers
Of all the forms of positive externality in consumption, the market for housing is the least understood. Being one of the most prevalent forms of market failure in the world, you are expected to be thoroughly familiar for this context, since it is widely recognised a s a merit good, yet unable to explain why.
As of writing, either pre-or post- COVID -19, more government around the world are facing significant problems in housing around the world. Read more on the broken housing market and Global Housing Crisis.) Interestingly, the Wold Bank has labelled Singapore as the world’s best public housing programme for the rest of the world to emulate.
Question
‘Today, 80% of Singaporeans live a government built apartment (HDB unit). There are about one million Housing and Development Board (HDB) apartments, largely clustered in 23 self-contained new towns that extend around the city’s coastal core.”
Source: World Bank, Accessed Jul 2021
(a) Explain how public goods lead to market failure and explain whether public housing i an example of a public good. [10]
(b) Assess the Singapore government’s methods of intervention in the housing market solely to achieve her microeconomic objectives.
Positive Externality in Consumption & Housing Market
Suggested Answer: Part (a)
Market failure occurs when the free market fails to achieve social efficiency or income equality. Social efficiency is achieved a society is bale to produce an output level of a good that is socially preferred, and occurs when marginal social cost (MSC) is equal to marginal social benefit (MSB) where MSB is the sum of marginal private benefit (MPB) and marginal external benefit (MEB), [MSB = MPB + MEB], and MSC is the sum of marginal private cost (MPC) and marginal external cost (MEC), [MSC = MPC + MEC]. External costs and benefits, or simply externalities, are costs and benefits of consumption or production experienced by society other than the producers or the consumers.
Public goods are goods that are non-rivalrous and non excludable in consumption. A good is non-excludable in consumption when the person who pays for the good cannot prevent those who do not from consuming it. Since people can consume public goods without paying for them, they are unwilling to pay for them. Therefore, non-excludability leads to the free-rider problem, resulting in zero market demand (DD =0). in the non-provision of public goods. A good is also non rivalrous in consumption when the consumption of the good by a consumer will not reduce the amount available to other consumers. In other words, an extension of the good to one more consumer will not reduce the amount available to current consumers. So producer does not incur any additional costs (aka marginal cost or MC), when extending the good to one more consumer, so he will not be able to charge any other price other than zero. Thus, there is no incentive to produce the public good in the first place, i.e supply is zero (SS=0).
Public goods will not be produced in the absence of government intervention. such as national defence and street lighting.
Public housing is not a public good as it is both rivalrous and excludable in consumption. For eg in Singapore, public housing is built by the SG government through the Housing Development Board (HDB) and is sold at subsidised prices. A HDB housing unit is excludable in consumption as the individual who purchases a public housing unit from the Housing Development Board will be the legal owner of the unit. Therefore, he can prevent those who do not pay for the unit from living in it. Public housing is also rivalrous in consumption as a public housing unit has a finite amount of space. For eg, a HDB has about 40 storeys of 4 units per HDB block only. Therefore, when an individual lives in a public housing unit, he will reduce the amount of space in the unit available to other individuals.
In conclusion,, as public housing is both rivalrous and excludable, it is NOT a a public good, but a private good.
Singapore Government Intervention in Housing Market
Not only is housing a private good, it is also an example of a positive externality in consumption, and hence justifies government intervention, and it may be on the grounds of microeconomic goals.
The Singapore government intervenes in the housing market that may achieve allocative efficiency. Without modern public housing, many people would have lived in slums or squatter settlements with poor sanitary conditions which were prone to outbreak and spreading of communicable diseases. Therefore, the consumption of housing produces positive externalities such as a fall in the number of breeding grounds for infectious diseases. In addition, a proper housing system means individual consumers may get sufficient rest, and this leads to a divergence between the MSB and the MPB resulting in under-consumption. The Singapore government provides housing through the HDB which leads to an increase in the supply of public housing. When this happens, the price of housing falls which leads to a rise in the quantity demanded and this may correct the problem of under-consumption.
In diagram 1 (sketch it on your own, as an exercise), due to marginal external benefits or MEB, the MSB is higher than the MPB. Therefore, the equilibrium output level (Qe) where MPB is equal to MPC is lower than Qs. The deadweight loss, which is the loss of surplus due to market failure or government intervention, is represented by the shaded area. Direct provision of housing by the S’pore government leads to a fall in the MPC curve. If the new MPC curve is MPC-1, output will be equal to Qs.
The SG government may also intervene in the housing market to address the problem of income inequity, the other microeconomic objective. Income inequity may result in some goods and services not being allocated to the people who need them more. Effective demand is demand backed by the ability to pay. The free market only responds to effective demands, such that it only distributes goods and services to the people who have both the willingness and ability to pay for them. However, the ability to pay does not reflect needs and hence individuals who need some goods but do not have the ability to pay for them have to go without the goods and services. This is likely to happen if the distribution of income in the economy is not equitable, with high income individuals who have high ability to pay pushing up the prices of some goods and services, keeping low income individuals out of reach of those goods and services.
Therefore, income inequity may lead to an undesirable allocation of goods & services to individuals in the sense that some goods may not be allocated to the people who need them more. This is a matter of concern especially if the goods are essentials or necessities such as housing. Housing has a high degree of necessity as it is essential for decent survival. Therefore, a high price of housing could lead to financial hardship. Direct provision of housing by the SG GOV leads to an increase in the SS. When this happens, the price of housing falls which leads to an increase in the affordability. Furthermore, HDB units are sold at subsidised prices below the market prices, which further increases the affordability. The S’pore government also provides housing grants and concessionary housing loans (cheaper loans) and allows CPF savings to be used for the purchase of public housing to make it easier for low income individuals to own a unit.
Not only does the Singapore government intervenes in the housing market to ensure the affordability of public housing, it also intervenes to curb the rising prices of private housing. For instance, it has imposed an additional stamp duty of 10% on foreign and non-individual buyers of private residential properties (condominiums, landed properties, etc). For citizens and permanent residents buying resale flats, they are required to dispose of all private properties before resale flat purchase, to curb speculative demand for properties.
On the other hand, the Singapore government also intervenes in the housing market to achieve her macroeconomic objectives.
For instance, making public housing affordable incentives Singaporeans to stay rooted to the country. The ownership of a property gives them a sense of belonging to S’pore, and they can stay on to contribute economically to SG. Specifically, the well-educated and skilled locals can add the size of quality, skilled labour force and contribute to her economic growth. Also, by making it easier to own a property, the government may encourage early marriages and therefore childbearing. After all, the birth rate in SG is rather low. By not allowing singles to buy a new public housing unit, the is beneficial in the mid to long term to the Singapore economy as population growth also contributes to economic growth.
Similarly, the Singapore gov intervenes in the market for housing in order to maximise land use. Without intervention, the tiny land space of S’pore would be exhausted easily. Further, the population of SG is rising mainly due to inflows of immigrants and foreign workers (with a plan to accommodate 10 million persons in S’pore!). Therefore, the Singapore government intervenes and builds taller housing blocks to optimise land use (now easily 40 to 50 storeys!) Such clever land use means more quality usage of another factor of production (land), alongside labour, and this further contributes to economic growth.
Mostly likely, it is is to ensure affordable housing that, the SG intervenes. At the same time, such affordable HDB units would entice locals to stay on in SG, and contribute to the Singapore economy. However, its intervention has its critics. HDB units are getting smaller and smaller, and some new building are in relatively inaccessible estates (Mandai, Sembawang, Jurong West, etc).
In summary, the Singapore government intervenes in the housing market to achieve both micro and macro economic objectives. Addressing the problem of income inequity is more important than achieving efficiency for necessities such as housing. Getting the citizens to be rooted in Singapore is a close second rationale, and has proven to slow down brain drain. Despite the rising prices of housing in Singapore, the Singapore government has fared well in addressing inequity issues, with one of the highest home ownership rates in the world.
Lacking higher order thinking skills of Application, Analysis and Evaluation? Join our JC Econs class and let our Econ tutor guide you through the core exam skills & techniques to securing your grade “A” NOW!