JC Economics Essay Series #39 – Positive Externality in Consumption

JC Economics Essay Positive Externality in Consumption Model Answers 

There are 4 types of externalities, of which a Positive Externality in Consumption is one. Similar to healthcare, the market for education is an example of market failure, namely allocative inefficiency. There are possibly other forms of failure as well. Without government intervention, education is definitely under-consumed in a free market.


(a) Explain how income inequality and pollution are causes of market failure. [10m]
(b) Assess the economic case for varying extent of government intervention in the market for education in Singapore. [15]
(We focus on education in S’pore in this sample, but the essay treatment is the same for all context listed above.)


JC Economics Essay – Positive Externality in Consumption for Education

Part A essay:

Refer to suggested answer essay on inequity and pollution here.


Part B essay:

Explain why the market for education in Singapore fails:
The market for education in Singapore is an example of a merit good. It has positive externalities and is deemed intrinsically desirable by the government. Due to the problem of imperfect information about the benefits of education, it tends to be under consumed when left to an individual. Thus, to correct market failure, varying degree of government intervention is required to achieve a more efficient allocation of resources so as to ensure that society’s welfare is maximised. The marginal private benefit (MPB) to an individual receiving education refers to the improvement in knowledge and ability to secure a higher paying career.


Marginal External benefits (MEB) refer to benefits accrued to third party who are not directly. involved in the consumption or production of the good. This refers to a better educated and skilled workforce that will bring about higher productivity. Coupled with positive investment climate, this would attract foreign direct investments, create employment and further boost Singapore’s economic growth. The development of knowledge and skills is also necessary to develop new areas of comparative advantage for Singapore such as the pharmaceuticals and biomedical industries. Hence, the marginal social benefit (MSB) gained by the society is higher than the marginal private benefit causing a divergence as shown below. Therefore, MSB = MPB+MEB.


In the diagram (sketch standard MF diagram below , on your own, as an exercise), the individuals will consume at level Qp, where MPB=MPC. However, since the consumption of education generates an external benefits to the society, the socially optimal level of output should be at Q., where MSB-MSC. Thus, without government intervention, there is under-consumption of education resulting in welfare loss, as shown by the shaded triangle.

Hence, government intervention is necessary to increase the consumption of education to the socially efficient level of OQ, and to achieve an efficient allocation of resources.
[Qn: Do we need one more form of market failure (MF)?)]



JC Economics Essay – Microeconomic Policies for Education

Explain varying degree of government. Intervention in the market for education in SG. In the market for education, there are varying degrees of government intervention because at the different levels of education (primary, secondary and tertiary) and for different individuals, there are varying levels of MPB, MEB and MPC. Here are the various microeconomic policies.


in Singapore, the Compulsory Education Act was passed in year 2000. The legislation states that compulsory education is up to Primary 6 as this is considered the minimum level of basic education that is essential. Thus, this would ensure that MPB or demand for education for the country as a whole is met at a minimal desired Op level. This is because if left to an individual without government intervention, education may be under consumed. The level of government intervention in this case is extremely high as this policy is a legislation where consumption of education is determined by law and is not a market-base solution. According to the Act, if a child fails to attend school regularly, the parent may be found guilty of the offence and the penalties are a fine or an imprisonment


Cash Grants / Scholarships / Bursaries
To attain the socially efficient level of consumption, the government can intervene to encourage consumption of education by offering cash grant per unit amounting to MEB This cash grant must be spent on education only. This will shift the MPB curve rightwards to coincide with the MSB curve. Consumption is thus increased to OQs.


The amount of cash grant given by the government for different levels of education will vary depending on the difference in MEB generated. For tertiary education, cash grant given for tuition fees are much higher than primary education due to a greater MEB generated by an additional tertiary graduate compared to one with only a primary school education. As such, this warrants a greater degree of government intervention due to that fact that highly educated, skilled workforce could contribute much more efficiently and effectively to the Singapore economy. Awarding local and overseas scholarships for academically stronger students by various Ministries also allowed students to pursue varied interests in tertiary education. In this case, the degree of government intervention is greater in accordance to the level of MEB generated by these scholars. Usually scholarships come with a bond which will allow scholars to work in selected ministries and contribute back to the Singapore economy.


The Singapore government also provides bursaries study grants for students. These schemes are targeted at the lower income families which raise demand for education through raising affordability. This is because without government intervention, students from lower income families may grossly under-consumed education. On the other hand, the government need not intervene for families who can afford education for the children as their MPB would already be high.


Direct Provision of Public Education
There are over 350 public schools in Singapore offering primary, secondary and post secondary education. The Ministry of Education takes ownership in providing quality education for its people, ensures that production is at the socially optimal level and caps or limits it to an affordable level. This is because if left to private producers, education in Singapore may be grossly under-produced and cost of education especially higher education will be extremely high. The level of government intervention in this case is very high as the Singapore government directly provides for most public education.


The Singapore government also provides a subsidy amount that is equal to MEB to operators of local tertiary institutions so as to reduce its operation costs and thereby increasing supply of education to the socially optimal level. Over the years, more tertiary institutions were set up in Singapore driven by the rising demand for lifelong learning and upgrading of knowledge and skills. In an effort to supplement the intake of existing tertiary institutions, the Republic Polytechnic (5th) was established in 2002 and the Singapore University of Technology and Design or SUTD (4th) will matriculate its first batch of students in 2012.


There are also many private education institutions in Singapore offering overseas university degrees which supplement the existing intake by local universities. However, the Singapore government did not intervene by means of providing subsidies to these private education institutions. This is because beyond the socially optimum level, such private education institutions are means to cater to the needs of individuals to pursue higher education or alternative studies.


However, it difficult to determine the amount of intervention accurately in order to attain the socially optimum level of education, because it is difficult to accurately measure the extent of MEB due to tangible and intangible benefits. In addition, the level of MEB also varies at different levels of education – the MEB tends to be higher at tertiary education, compared to the primary education. Hence, different policies that cater to different levels of education will have to be varied according to their different extent of MEB and ultimately the level of intervention may be inaccurate.

Moreover, intervention cost of the government in the provision of education has to be considered too. The Singapore government spends approximately S$9.7 billion in its education budget. With such a hefty sum invested into education, there is an opportunity costs on government funds, which cannot be channelled to other areas.

There may also be government failure as well in terms of bureaucracy, inefficiency and lack of public support for government policies. Although the socially optimal level of output may not be attained due to limitations of implementing measures, government intervention usually ensures a better allocation of resources and results in an output level that is closer to the socially optimal level.
(Note: is this a strong point for the context of Singapore education market?)


There could also be other reasons that influence degree of government intervention in the market for education such as free education for the Malays up to Junior College (JC) level. The government recognizes the special position of the Malays the indigenous people of Singapore, and safeguards their political, economic and educational interests. Accordingly to Article 152 of the constitution, it is the responsibility of the government to “constantly care for the interests of the racial and religious minorities in Singapore”.
(Note: is this social or economic point? If economic, related to which concept?)


However, the basis of promoting students to a higher level of education is solely on the basis of achievement, merit and hard work, upheld by the principle of meritocracy. Meritocracy recognises and rewards everyone who works hard and excels and it is the best means to maximize the different capacities of a small country like Singapore.


A-Level Econs Essay Mark Scheme
L3: For a well-developed answer that is able to explain why market fails and the economic case behind varying degree of government intervention (a total of 3 factors)
L2: For an under-developed answer that is able to explain why market fails and the economic case behind varying degree of government intervention (a total of 2 demand and/or supply factors)
L1: A smattering of valid points

E2: For an evaluative assessment based on economic analysis
E1: For an unexplained assessment or one that is not supported by economic analysis.


Remarks by JC Econs Tuition Specialist
1. Besides +VE EXT, can we also choose equity?

2. How about little or low intervention in the market for private education?


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