Teacher’s Guide
Pre-arrival:

Teachers are encouraged to play the “Economics of Land Transport
in Singapore” video during lessons as a prelude to the visit.

Split the class into 4 groups to better facilitate the activities.
Stations
Gallery
Teacher
Pre-tour
Lobby

Short briefing by facilitator.

Assist the facilitator to assign groups and engage the students during the
icebreakers.
Inside
Journeys; Memories; Formative Years; Today
Gallery

The teacher’s role is to accompany the students through the exhibition,
clarifying doubts regarding the worksheet where necessary.

Refer to Discussion Questions for the full list of questions, location, and
suggested answers.
Challenge Theatre

Nil.
Visions

The teacher is to assist with the essay question discussion.

Recommended (Choose 1):

o
JC1 & Below: Q1
o
JC2: Q2
The teacher is to allocate different sections of the question to each group
to answer. 15mins will be given for group discussion, followed by 15mins
presentation of answers. The facilitator will provide the required logistics.

The teacher need not follow the model answer; the discussion is entirely for
the teacher to run.
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Discussion Questions
Zone 2: Memories (Pre 1960s)
2a. What kind of market structure did the bus industry in Singapore
resemble?
2b. What are the potential implications that would have arise if the pirate
taxis were allowed to operate?
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Zone 3: Formative Years
3a. What are the benefits of having two instead of 1 dominating firm in
the bus industry?
3b. What are the potential negative externalities that may arise if car
ownership in Singapore was not controlled?
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3c. Do you think that there is a need for price discrimination in public
transport fares?*
*Refer to poster at Formative Years
Zone 4: Land Transport Today
4a. What are the three strategic thrusts?
4b. How does scarcity influence the way that our infrastructure is built?
(e.g. Roads, MRT Tracks)
Reflections:
If you are a policy maker, will you amend the existing policies or leave them?
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Suggested Answers:
1a. Which city has one of the the fastest moving train in the world?
Answer: Shanghai
1b. What facilities do we have in place to help the mobility challenged to
move around?
Answer: Ramps and tactile guidance
2a. What kind of market structure did the bus industry in Singapore
resemble?
Answer: C. Monopolistic Competition
In the past, the bus industry was in a monopolistic competition, where there are
many small bus firms offering different bus services and routes. Also, there were
low barriers to entry as the cost of purchasing a vehicle and operating costs were
considerably low.
2b. What are the potential implications that would have arise if the pirate
taxis were allowed to operate?
Answer: This would result in a black market where illegal taxi syndicates can
charge consumers at an exorbitant price, given no government regulation and a
shortage of supply.
3a. What are the benefits of having two instead of one dominating firm in
the bus industry?
Answer: A market with single seller allows the dominant firm to set monopolist
price which is above the social optimum price. An oligopoly/duopoly market
structure allows a contestable market where firms engage in non-price
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competition such as product differentiation and service improvements.
3b. What are the potential negative externalities that may arise if car
ownership in Singapore was not controlled?
Answer: b. B&C only (Fall in work productivity and air pollution)
Negative externalities are spillover effects on 3rd parties who are not involved in
the consumption or production of the good. In this case, the negative
externalities includes fall in work productivity and air pollution.
3c. Is there a need for price discrimination in public transport fares?
Answer:
With different fare charges, consumers with lower purchasing power
would now be able to consume public transport which they would otherwise
unable to with the regular adult fare. Without price discrimination, the lower
income group may not be able to afford public transport, which result in social
welfare loss.
Reflections:
If you were a policy maker, will you amend the existing policies or leave
them? Why?
Answer:
Students have the freedom to give any suggestions as long as they are logical.
There are no right or wrong answers.
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Essay Questions
1) Why does Public Transport in Singapore have an Oligopoly market
structure instead of a Monopoly?
a) What are the characteristics of a monopoly?
b) What are the disadvantages of a monopoly?
c) What are the characteristics of an oligopoly?
d) What are the potential benefits and problems of an oligopoly?
e) What are the policies in place by the Government to tackle these issues?
Evaluate them.
f) Why is Oligopoly more desirable as compared to Monopoly in Singapore’s land
transport setting?
2) With reference to examples, discuss whether there is a need to change the
current policies adopted by the Singapore government to deal with market
failure caused by negative externalities.
a) Market Failure: What causes market failure?
b) Externalities: What are externalities?
c) Example of Negative Externalities/Market Failure in Singapore. How do they
lead to Market Failure?
d) Correcting Market Failure: What are some of the policies implemented by the
Singapore government to deal with these external costs? How do these policies
work?
e) Limitations of Policies
f) What are other suggestions?
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Model Answers
Market Structure
Why does Public Transport in Singapore have an Oligopoly market structure
instead of a Monopoly?
Market Structure
Monopoly
Oligopoly
Characteristics of
Characteristics of
Monopoly
Oligopoly
Problems & Benefits
Problems & Benefits
Solutions and Policies
Evaluation of Policies
Conclusion
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Summarized Table of Market Structures
Market Structure
No. of Firms
Monopoly
Oligopoly
Monopolistic
Perfect
Competition
Competition
Many Small Firms
Single Large
Few Large
Many Small
Firm
Firms
Firms
Nature. of
1
Homogeneous
Differentiated
Homogeneous
Products
Product/Service
or
with no close
Differentiated
Low
Low (Free entry)
substitutes
Barriers to Entry
Absolute or very
High
high
In a Monopoly, the large firm is able to reap economies of scale, as their
operations are large enough to fully utilize their equipment and infrastructure
efficiently, reducing marginal costs. Purchases of production inputs in large
amounts also allow for bulk discounts from suppliers, contributing to the
reduction in overall costs. As a monopoly, the firm is a profit maximizing firm with
the ability to set prices, and the profit maximizing condition is the point where
marginal cost equate to marginal revenue. The firm will then charge its product
or service at the price derived and this can be seen from the figure illustrated
below.
P
MC
MR
D
Qty
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This results in a loss of welfare, also known as a deadweight loss, denoted by the
shaded region due to inefficiency in the allocation of resources. This welfare loss
is also a form of market failure, caused by monopoly power.
Public transport is a necessity to the population of Singapore and demand for it
will generally be very inelastic, and this is an incentive for a monopoly to increase
prices.
P
S
P2
P1
D
Qty
Q1 Q2
When demand is inelastic, a price increase from P1 to P2 will lead to a less than
proportionate decrease in quantity demanded from Q1 to Q2, and this
incentivizes the firm to increase prices to maximize profits as the increase in
revenue outweighs the loss in demand. While the firm enjoys supernormal profits,
the consumers suffer due to the high prices, which is not appropriate for the
market of public transport.
As an effort to improve welfare and make public transport affordable to all, the
government allowed two firms to operate the public transport systems in
Singapore, both of which are privatized but highly influenced and regulated by
the government.
In particular, Singapore’s public bus and rail service is under the oligopoly market
structure with 2 firms dominating the market, namely SBS and SMRT. Such a
particular situation is also known as a duopoly. In a duopoly, firms are
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encouraged to compete for the market by constantly innovating and
differentiating their products, which is beneficial to the consumers. Also, the two
firms are able to keep each other’s prices in check, keeping prices low as
compared to a monopoly. Similar to a Prisoner’s Dilemma game, firms have no
incentive to independently increase prices, as the other firm will not follow suit,
allowing the firm with the lower price to capture the entire market. On the other
hand if a firm decreases its price, the competitor is obliged to follow suit to avoid
loss of market share, and this ultimately leads to a price war: both firms may end
up reducing prices to the socially optimal price, where price equals marginal cost.
The highly interdependence of firms in an oligopolistic market is represented by
the kinked demand curve as illustrated below.
P
MC
MR
D
Qty
However, there is also a possibility of collusion as well. Collusion occurs when all
the firms in an oligopolistic market come together to set prices at a high price.
Such cooperation will increase profits of the firms, putting them in a position
similar to that of a monopoly.
To address these potential problems, regulatory boards such as the Public
Transport Council (PTC) have been set up to regulate transport fares for both bus
and rail services. This way, the government is able to ensure public transport
prices are affordable, and that both firms are still able to generate enough
revenue to sustain their operations. PTC also ensures that both firms do not
neglect providing services to areas less travelled, as they are generally less
profitable routes, maintaining a comprehensive network of services for the nation.
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To further promote competition between the two operators, the Land Transport
Authority intends for the two operators to compete for the market by setting
contestable conditions. The two firms will then compete for the rights to operate
in a set of routes for a specified period of time. Not only will this ensure that
both firms will constantly pursue higher standards, greater efficiency, and lower
prices, it also reduces duplication of services to improve efficiency of public
transport on the whole.
To conclude, public transport in Singapore adopts an oligopolistic market
structure in order to reduce the welfare loss associated with monopoly power.
The competition also promotes innovation and higher quality of services, which
are beneficial to consumers.
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Market Failure
Question:
With reference to examples, discuss whether there is a need to change the
current policies adopted by the Singapore government to deal with market failure
caused by negative externalities.
Market Failure
Factors of Market
What are Externalities?
Failure
Negative Externalities
Examples in Singapore
Evaluate current policies
in Singapore
Justify/Suggestion
Conclusion
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Market Failure: What causes market failure?
Market failure occurs whenever the price mechanism fails to allocate resources in
a socially desirable way, and is generally caused by monopoly power, production
of externalities, and the failure for markets to clear due to over or underconsumption. Simply, the market does not provide the optimal amount of a
particular good.
Externalities: What are externalities?
Externalities arise whenever the production or consumption of a good has
spillover effects on 3rd parties who are not involved in the production or
consumption of the good. There are positive and negative externalities,
depending on whether the externalities bring about benefits or costs. In the
context of land transport, negative externalities include the external costs arising
from car usage such as road congestion leading to lower productivity and
pollution.
Example of Negative Externalities/Market Failure in Singapore
Road congestion is an example of market failure in Singapore. Figure 1.1
illustrates how road congestion leads to market failure in Land Transport.
Benefit/Cost
MSC
MPC
MEC
Volume of Traffic
Ts Tm
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We assume that MPB = MSB as there is no positive externalities. The market
equilibrium, without government intervention, is where MPB=MSB cuts MPC, and
equilibrium number of cars is at Tm. A driver would only consider his private
benefit and private cost e.g. fuel costs but not the external cost he imposes on
others e.g. fall in work productivity due to late arrival caused by road congestion.
Hence, there is a divergence between Marginal Social Cost and Marginal Private
Cost, which leads to an over-usage of cars at the market equilibrium where
Tm>socially optimal number of cars on the road(Ts). The socially optimal number
of cars (Ts) is where MSC = MSB, which the additional cost of having an extra car
on the road is equal to the additional benefit of the last unit of car on the road.
Since the market equilibrium is not at the socially optimum output level, there is
an allocation inefficiency leading to market failure.
Correcting Market Failure: What are some of the policies implemented by the
Singapore government to deal with these external costs? How do these
policies work?
1) Electronic Road Pricing
The Singapore government introduced the Electronic Road Pricing (ERP) as a form
of taxation imposed on road users. The ERP is an electronic system of road
pricing based on pay-as-you-use principle. There are different charges for
different types of vehicles like motorcycle, cars and heavy trucks. The ERP makes
road users bear the total costs for the use of road space, which includes private
costs and external costs.
The additional ERP charges during peak hours force road users to internalize the
external cost of congestion and reduce demand for road space during peak
hours. This induces them to travel during non-peak hours or use alternative
routes, and even other modes of transport like the MRT and public buses. A tax
equal to marginal external cost (MEC) in the form of ERP would bring MPC closer
to MSC, and reduce volume of traffic from Tm to Ts, achieving social optimal
number of cars on the roads.
The ERP affect driving habits, as car owners will be encouraged to drive during
non-peak hours, and take public transport during peak hours when ERP gantries
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are in operation. This may also discourage non-car owners from purchasing a car
due to an increase in total costs of owning a car.
Limitations of ERP
Due to the rising affluence of Singapore residents, not only is demand for cars
skyrocketing, increasing the cost of ownership through ERP loses its effectiveness
as the proportion of income spent on cars decrease. Changes in the taste and
preferences of Singapore residents is also a huge factor, as more and more
residents treating cars as a necessity, causing demand to be rather price inelastic.
Alternative mode of transports like buses and MRT are also no longer considered
as close substitutes for cars due to a lower comfort and efficiency level,
contributing to the inelasticity of demand. Hence, the number of cars on the
roads during peak hours may drop less than proportionately when there is an
increase in cost of car usage and ownership due to the implementation of the
ERP.
One ongoing initiative to mitigate this problem is the use of a satellite-tracked
electronic road-pricing system that relies on GPS systems in vehicles. Drivers
would be charged based on the duration they stay on the road and distance
travelled. Hence, ERP rates would correspond to the road user’s actual
contribution to traffic congestion, and marginal external cost to be internalized by
each driver more fairly. Nonetheless, such measures incur high costs and can only
be implemented after careful planning.
2) Vehicle Quota System/COE
Another policy to the Singapore government has adopted is a Vehicle Quota
System (VQS), also known as Certificate of Entitlement (COE). This scheme directly
controls car ownership and consumers’ demand for cars. Prices of COE are
determined by market forces, which only a fixed number bidders can attain the
certificate. Hence, COE is effective at controlling car population growth at a rate
that the current road space can accommodate.
Limitations of VQS/COE
While the number of cars on the road can be controlled, it is difficult to control
the number of times and length of time the car is used. Also, as COE is
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determined by market-forces, the bidding price may increase to an exorbitant
amount that is out of reach for the lower income families. Hence, it may result in
a social disparity, which only the rich could afford cars. In addition, families with
higher income may purchase multiple cars, which further deny the lower income
group from car ownership.
Suggestion/Alternative policies
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Land Transport Economics Program: Ice-Breaker Game
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