The Bus Service Enhance Programme cost $1.1 billion. PUB has an island wide drainage improvement project. For both cases, discuss whether the usage of government funds is justified.
The $1.1 billion Bus Service Enhancement Programme covered the purchase of 1000 new buses and 80 new bus services progressively introduced between 2012 and 2017.PUB has an island-wide drainage improvement programme to continually upgrade our drainage infrastructure to cater for new developments, alleviate flood risk and rehabilitate aging infrastructure.
For both cases, discuss whether the usage of government funds is justified. [25]
Introduction
Identify and address that the use of government funds in the above is due to the provision of public goods and presence of positive externalities.
Public good are goods that are both non-rivalrous and non-excludable and are not provided for by the free market. Positive externalities are external benefits received by 3rdparties not directly involved in the production or consumption of a good or service, of which these benefits are unaccounted for in the free market. Both contribute to market failure, defined as a situation whereby the free market, in the absence of government intervention, fails to allocate resources efficiently, resulting in societal welfare not being maximised.
Costs vs. Benefits of government expenditure on the upgrade of services
Figure 44a: Positive Externalities in the Market for Public Transport
“$1.1 billion subsidy to increase bus capacity and bus service levels under BSEP”
Justified
Marginal private costs incurred by public transport providers include cost of provision such as drivers’ salaries & fuel.
Marginal private benefits enjoyed by individuals is the transport service to their desired destination.
Marginal external benefits are positive externalities generated from increased bus services which can lead to shorter journey times and increased frequencies – time savings for workers and more time for work and leisure (benefits for both families/households and firms in general)
The presence of external benefits means that there is a divergence between marginal external benefits and marginal private benefits.
With reference to figure 44a, which shows the market for bus rides,
Free market output would be at Qm where MPC=MPB, since consumers would only consider their own private costs and benefits when choosing to purchase public transport services and not the external benefits
Socially desirable level of output is at Qs where MSC=MSB.
Since Qm>Qs, underconsumption of public transport services and deadweight loss of area ABC is generated
Due to allocative inefficiency, market failure exists in the market for public transport services
Not Justified
1. Bus services in Singapore are provided by private firms like SBS Transit and SMRT.
2. Such a subsidy subsidises these firms, lowering their cost of production and allowing them to make more profits.
3. From the government’s perspective as a regulator, there is a need for these firms to be providing efficient transport services in the first place; regulatory actions can be taken against these firms in the event where efficiency is neglected.
4. The Singapore government has also implemented a framework (QoS) to maintain a balance between the profit maximization motive of the private firms and the other benefits.
170 drainage improvement projects island-wide using government allocated funds
Justified
1. Drainage improvement project increases the capability of flood prevention.
2. Drains are a public good
· Non-excludable:The prevention of non-paying consumers from consuming the good is impossible or prohibitively costly to do so
Benefits from the drainage system and its improvement cannot be isolated. For example, an improvement of a frequently flooded location along Upper Bt Timah Road would benefit any motorists or pedestrian passing through during a day of heavy rain as flooding would be less precedent. These motorists or pedestrians are unable to be excluded from these benefits
· Non-rivalrous:The cost of an additional consumer will not raise the overall total cost of the provision of a good nor diminish the total quantity available of the same good
The marginal cost of provision for the drainage system and its improvement is zero as an extra person reaping the benefits of fewer floods in a location would not diminish the overall ability of the system to prevent flooding
3. The non-excludability nature of the good leads to the inability of producers to charge for the provision of such a good as there lies no excludability option for those who are unwilling to pay for the good, even while reaping benefits from it.
4. This is known as the free-rider problem, as consumers conceal their demand and preference for the good due to the advantage of not having to pay.
5. The non-rivalrous nature of the good means that the MC = 0 and even if a price could be set for the good, there is no efficient pricing since the condition P = MC equates to 0.
6. The good will be thus left unprovided by the free market with no producer willing to produce it since the costs of doing so cannot be recovered.
7. The only possible efficient response would be for the government to step in to provide for it and especially since in this case, the potential benefits are too huge significant to do without.
Not Justified
1. Consider the need fora total of170 drainage improvement projects.
2. Evaluate if all the 170 locations that drainage improvement projects are planned for require the upgrade in infrastructure.
3. Determine if the benefits of the upgrade in infrastructure can outweigh the costs of the projects.
Conclusion
In the case of positive externalities generated by increased bus services, the government can be seen to have utilised its funds justifiably, since public transport (bus services) has been performing with reasonable standards in Singapore thus far; the government has also been willing and firm in meting out severe fines when the public transportation private companies have failed to deliver efficiency. On the part of the improvement in drainage systems, there exist discussions on the huge number of drains– how long would these drain improvements last before they require new infrastructure is questioned.
Comments
The drainage improvement projects were in response to flash floods in recent years and torrential rain has yet to be totally eradicated especially in the hot zones of Bukit Timah and Tiong Bahru. These floods can uproot trees and cause extended periods of disruption (and lowers productivity and such) in the economy.