On transportation

Kway Teow man has posted his opinions on Singapore's transportation system. I would like to take a closer look at his policy suggestions. While his recommendations are socialistic in nature and really does care for the underprivileged in our society, there are economic drawbacks.

(1) Monopolies are allocatively and productively inefficient.

He clearly understood that concept, and thought that nationalisation is the answer. He rightly point out that the burden will fall on taxpayers, but not just initially. It will continue to be a burden on tax payers. His goal of nationalisation is to force the monopoly to produce where price = Marginal Cost, and quantity is at minimum average total cost. That is not possible. At P=MC, demand at that price is way higher. And at min. ATC (the productively efficient point), the price is higher than P=MC price (the allocatively efficient point).

Let's say we don't care about productive efficiency, since it focuses more on the firm than consumers (forcing a monopoly to operate at that point also creates a loss). Let's say we look allocative efficiency where consumers. This is where opportunity cost to produce the marginal unit equals to the cost consumers are willing to pay for that unit. If the monopoly is forced to produce at P=MC. This means that the monopoly is going to operate at a loss. Total revenue < Total cost. This is where the tax payers come in again. Tax payers have to pay for the bus service whether they take it or not. That's hardly as fair as the current system. Now everyone, not just public transport users, have to pay for the system.

Ok. So we produce at higher quantities and lower prices at either of the two points, but let's say people cannot stomach paying for public transport through taxes. So we try to produce where the firm breaks even, or where marginal revenue = marginal cost, then the price will be far lowers than its allocatively efficient point, but the quantity will continue to be at the level before the nationalisation. That's your break even point. Doesn't solve anything because at that Price, demand is more than the quantity supplied. So there's a shortage. And a black market may open up to meet the demand.

There is almost no good way to regulate a monopoly. At least not from the economic stand point. The only thing I can think of is a profits tax. Which adds to nothing, but it does take away incentive to invest in the future, but for transport monopolies in Singapore, it's ok, since the government invests in improvements. The firm can also be forced to update equipment by law or regulation, as it does with taxis.

(2) Not raising or reducing consumption tax

That sounds like a good idea. Consumption taxes usually affect the poor more than the rich since the cost of fixed spending increases proportionally higher in poor household, than in rich households.

Let's say that society accepts government run, subsidised transportation, through taxation. If consumption tax is not moved, we have to pay for it somehow. A rise in income tax is another way to do it. Corporate taxes should not be raised simply because this would discourage businesses in an already weak economy. So income tax it is. This means raising the income tax. A rise in income tax means that consumption goes down. This is because there is less money to spend now that it is being taxed. Along with the multiplier effect, consumption and investment could go down. This affects the overall GDP. Y= C + I + G + NX. Y = economy, C = consumption, I = investment, G = government spending, NX = net exports.

Let's say the government decides not to raise taxes, but sell bonds to raise money. Unlike US t-bills and t-notes, Singapore's government bonds are not as enticing as US government bonds. Which means we can only sell so much. There are a few problems with that. Assume that all our bonds are snapped up. This could lead to a "crowding out" effect. Where private firms cannot raise capital to invest, since a large sum of the private money is going to the government. It also means a rise in capital inflow, currently Singapore has a capital account deficit, of $22 million. I suspect maintaining a bus system would require another 5 to 6 million at least. So this means that our capital account deficit will be reduced.

Before you go cheering at a reduction in deficit, it also means that our current account balance surplus will be reduced by that much. It means we export less or import more. If that doesn't happen then it means that our foreign exchange assests is set to fall even more. Which means drawing from our reserves.

(3) Individual licences for taxis

I agree with you. I would argue going a step further. Abolish cab companies. This would create a near perfect competition market. It would have a large number of buyers and sellers, homogenuous product (travel in a taxi is more or less homogenous), perfect information (no advertising), and negligible barriers to entry (a driving license and a license to operate a taxi and cost of taxi). This produces both allocative and productive efficiencies. Too wonderful. The only problem is no economic profits in the long run (there might still be accounting profits) for the taxi drivers. As long as the requirement to obtain a taxi is kept to the minimum and we hand out as many licenses as demanded, the market would regulate itself. This could mean alot more taxis or a lot less taxis on the road, but it is a good model.

The problem with a dual structure with a few large firms and many small ones (individual owners) is that the big firms will lower prices to the point that the small firms are priced out (economies of scale let them do that), which benefits the consumer in the short run. The long run is that once all these small firms are no longer a threat to the large firms, prices return to their high levels. Worst if the taxi companies are in collusion. Nothing like some small fish to make the big ones work together to protect their interests.

Another senario could be one of price leadership. The biggest firm basically becomes a price leader, and everyone follows. This is usually because of uncertainty, which is what many small firms could cause to the market. In then end, they all agree that one firm set prices and the rest follow. It'll help the taxi drivers but not us the consumers.

In the oligopoly model, regulation could get somewhat complicated. The regulator could make it so that barriers to entry are too high for potential entrants. I mean the regulator might not be colluding with the oligopolies, but it could ask for better safety standards, safe driving records, low prices to help consumers, annual barrage of inspections, license renewal every year, new car every 10 years, only certain types of cars to be used and so on. It's not to help the established firms, but to have some safety and to help the consumer.



Yes KT man, this is my analysis of your proposals. I would commend you for making them, but there are some areas you failed to analyze when you made those proposals. I know my analysis is economically based and it reveals sort of my biases. For those not in the know, I am a Liberal in the traditional sense. Free market, limited government intervention in the market, and all that good stuff.

There is no good way to counter monopoly power in my opinion, regulation can only go so far. A Profit tax is my answer. That works best in my opinion. That may bug the shareholders, but if they're not happy, they can sell the shares.

Keeping consumption tax low is good, in my opinion. That does mean the the government has to raise revenue elsewhere. If your proposal to nationalise all transportation is to take place, we'll have to pay somehow. There are pitfalls to other forms of revenue collection.

Individual licences all around. Totally abolish cab companies. In fact regulate so that none may form. A perfect competition market? That would be my dream come true.

That's it. I hope you don't take this as me knocking you, just looking at your proposals and dissecting them. Helps us both understand the situation better.


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