Some questions found from an econs powerpoint

What type of good is tobacco?
Name the applicable market failures associated with cigarettes. Hint : There are 2 main market failures.
How has the Singapore government intervene to correct the market failure with regard to cigarettes?

economics of smuggling

Smuggling is the clandestine transportation of goods or persons past a point where prohibited, in violation of the law or rules. It happens because people are trying to:-

(1) Supply demand for some illegal goods or services
For services and goods such as drugs, supply for them are very low, since it is against the law. Since there exists a market for such goods, competition for these goods will drive the prices up due to the low supply. This gives merchants high cost incentives to smuggle such goods into the black markets to earn huge profits.
Furthermore, since drugs are a form of addiction, they are price inelastic in demand. A change in price brings about a less than proportionate change in quantity demanded. Drug addicts will take drugs no matter how expensive drugs are.
Making use of this concept, merchants will also increase the price of drugs to maximise their revenue.

(2) avoid paying taxes and levies on imported goods
Taxes discourage the supply of goods or services by increasing its cost of production, resulting in higher costs and lower profits (profit = TR - TC), and giving producers less incentives to produce their goods and services. Hence, motivated by this high cost of production due to taxes and levies, some producers will choose to smuggle in their goods instead.
For example, a smuggler might purchase a large quantity of cigarettes in a place with low taxes and smuggle them into a place with higher taxes, where they can be sold at a far higher margin than would otherwise be possible. It has been reported that smuggling one truckload of cigarettes within the US can lead to a profit of US$2 million.


But why prohibit certain goods and services? (from government's POV)

(1) Government wants to protect domestic industries and reduce competition from imports from overseas.
These imported goods will affect the sales of locally-produced goods that are close substitutes, especially if they are at a lower price. People will turn to cheaper alternatives, hence affecting these domestic industries, resulting in a shift in the demand of goods from domestic industries leftwards.
Example: Smuggling in China was booming and allegedly ruining many industries in the south of the country. It was said that $300m worth of contraband had been confiscated this year and that represented a mere fraction of the amount of goods involved.

(2) Question of morality: Government wants to protect its citizens, since goods such as liquor, cigarettes and drugs are generally harmful to many aspects of our lives.
The government understands that without government intervention, this will result in partial market failure, since the market economy is unable to account for the negative externality from the harm due to these goods (e.g. drugs). The price mechanism fails to bring about a socially efficient allocation of resources since the cost to society is unpriced by the price mechanism and is not included in the private costs of production. (There will be welfare loss due to over-supplying of such goods or services.)


Hence, in other words, prohibition of the importing of such goods and services is government intervention, while smuggling is simply the free market's revenge on over-regulation.

References:
1. Business: The Economy. James Morgan on the economics of smuggling BBC News (July 15, 1998)

http://news.bbc.co.uk/1/hi/business/the_economy/133376.stm
2. Smuggling. Wikipedia.
http://en.wikipedia.org/wiki/Smuggling

Happy VBC-ing. Let's not give up hope :D

- HAIDEE

How global warming is helping terrorism to grow

Global warming is a market failure. It has so many externalities and effects that it is simply not possible for me to post it out here. Rather I'll post only the good(interesting) stuff - something that people don't think of when they think about global warming and its harmful effects. Global warming is creating an environment for the Taliban (widely perceived to be a terrorist group/movement just in case you live in a cave) to thrive in!

Firstly, global warming lengthen the period of droughts, especially in the middle east. Unfortunately, poppy plants (can be harvested to make heroin) is relatively drought resistant and more farmers are turning to farming poopy plants as they can survive droughts while other cash crops wilt in the sun and in the absence of water for extended periods of time. The increase in the no. of suppliers of poppy will increase the supply of heroin (rightward shift of supply curve), which results in the higher equilibrium quantity and therefore an increase in drug usage as well - more negative externalities eg. social problems!!

Moreover, this strengthens the Taliban as they tax heavily on the heroin trade. Since heroin is a drug which is addictive, the demand for heroin is price inelastic. This means that there will be a greater incidence of taxation on consumers, so consumers bear most of the tax. And also, Afghanistan almost has a monopoly of the heroin trade, supplying over 90% of the world's opium poppies by 2006. Which further means that the Taliban can raise the prices of heroin as much as they want since they are a monopoly and demand for heroin is inelastic. Therefore, the Taliban earned over USD 500 million from heroin trade in 2006 alone. THAT is a whole lot of AK-47 and rockets and money to recruit suicide bombers!

Furthermore, with worse droughts in the country, many Afghan farmers lose their entire crop and savings, hence they turn to the taliban for economic assistance by either 1.) joining their army(suicide squads and militias) or 2.) farm poppy plants for them. Obviously if the Taliban has more people under them, they would prove to be deadlier and stronger.

Finally global warming has caused the snow up in the mountains that surround several places in afghanistan to melt. Normally during winter, when the mountains are snow-capped, there is a lull in the fighting between the allied forces and the Taliban. However without the snow, Taliban fighters are able to cross mountain passages and smuggle weapons and troops through. Furthermore as US president Obama sent out more American troops to Afghanistan this year, they do not have sufficient time (as do normally do during winter) to set-up their defenses and be established. This would result in more Allied troops casualties and another victory for the Taliban.

In conclusion industries and nations around the world should cut down on their polluting of the air/ world. Because if not, all your multi-billion dollar profits would come to naught the moment the terroist gather enough strength and bomb their way to your factories!

bibliography:

http://12.129.147.65/wp-dyn/content/article/2006/12/01/AR2006120101654.html

my brain!

and valuable input from yingda! :D

Cheers!

Willie Wee

Randommm

Today in lecture we learnt that the demand curve also represents Social Benefit!

SMB = PMB + EMB (Social Marginal Benefit = Private Marginal Benefit + External Marginal Benefit).

Or in other words, Summary Message Board = Paper Message Board + Electronic Message Board.


xD

Ok I'm super 'boardeddd' now xD

Market Failure - Congested class benches

Scenario: Every morning when you go to school, the class benches are all filled. So if you are those who reach school not too early but not too late, you'll have to stand around and look at people sitting on class benches, because there is no more space for you to sit! ><

Firstly, supply of class benches is vertical. This is because class benches are one-of-a-kind - there is only one of this kind of benches where your friendly classmates will gather around and do homework, not any other benches.

Secondly, there is shortage of class benches because each class has 26 students and a class bench can only sit about 8 students. Thus, quantity supplied is far lesser than quantity demanded, assuming that everyone wants to sit at class benches. There are no close substitutes for class benches as there is only 1 such bench in school that is allocated to each class.

Also, demand for class benches is highly affected by times of the day. In the morning, ~7.00am, demand for class benches is high because people start streaming to school. Once flag raising is over, ~7.55am, demand for class benches decreases to almost 0 because most students have lessons, and would not linger around the class bench (unless they want to get demerit points)

By right, class benches are pure public goods because it has the characteristics of non-excludability and non-rivalry. This is the ideal case. However, because people from other classes might shoo you off when you sit on their class benches whenever demand is high, class benches should only be considered as a public good. As such, additional class benches will not be provided by the market/school management.

The provision of public goods like class benches suffers from the "free rider" problem. Since it is impossible to exclude those who do not pay from using class benches, no one has the incentive to pay what the class benches is really worth to them. (And in some cases, students may even not have the incentive to protect class benches, and will vandalise them) And since the students can have all the benefits from class benches (sitting down to chat and discuss homework) without paying for it, there is a absence of price signal and no one will supply class benches. Hence, despite the fact that class benches have valuable benefits to students, where students can put there bags and have a table and chair to do work, the market will not provide class benches =(

Sometimes, there is a negative externality because other students will have difficulty walking through and may waste more time just trying to walk across the congested class bench area.In order to solve this problem, especially to encourage students to protect class benches, our discipline master has warned that any heavily vandalised class bench will be removed and that class would have no class bench. This acts as a negative incentive to discourage students from vandalising class benches. However, supply of class benches has still not increased over a long period of time. This is also partly due to space contraints - there is a lack of land.

In conclusion, class benches are congested but nothing much can be done because 1. not enough space to put more benches 2. no one has the incentive to buy more benches because it is a public good. Also, even though class benches have no close substitutes, in real life, not everyone wants to sit on the class bench. Some may choose to go to the canteen to eat breakfast while doing homework. However, this only alleviates congestion slightly and class benches can still be considered congested.

-Leona

The Rising Cost of Death

Hmm ok before I shelf the previous copy of Newsweek, let me quickly share an interesting article... which examined the economics in death!

This article 'Where Death Comes Cheap' is found on pg 22 of the March 16 issue of Newsweek, but for everyone's convenience, here is the link for the online version of the article :

http://www.newsweek.com/id/188139/page/1

I shall post some important excerpts here, for easy reference:

'With its revenue directly tied to the death rate, the $15 billion funeral industry has always been seen as recession-proof. No matter how bad the economy, people always die and families always spend money memorializing them, often equating dollars spent with respect paid, and rarely shopping around. Funeral homes tend to be the oldest businesses in town and generally earn solid profits...'

[In the past, the demand for funeral services was price inelastic. There were also very few close substitutes for funeral services, and funerals could be considered as necessities, hence accounting for the price and income inelasticities of its demand. As a result, suppliers could raise the prices of funeral services easily and there would be a less than proportionate fall in quantity demanded of the services. The area under the demand curve at the higher price was larger than that before the price hike, hence allowing suppliers to get an increased revenue and in turn earn huge profits (assuming ceteris paribus).]

'But this recession is proving different—and as it deepens, families are beginning to seek ways to cut bills that were once seen as sacrosanct. Long-term trends (like the growing acceptance of cremation) are coalescing with the down economy to lead some industry veterans to sense a shift. "There's a major movement toward low-cost options right now," says R. Brian Burkhardt, a funeral director in Wheaton, Ill., who writes an industry blog called Your Funeral Guy. "Those businesses that adjust will do fine—and those that don't will be gone."'

'Now it's cultural shifts that are allowing some of these discount options to thrive. Chief among them is the growing acceptance of cremation, which accounted for less than 4 percent of funerals in the mid-1960s, but more than one third of them last year. (Some observers expect the cremation rate to hit 60 percent by 2025.)'

[However, in the economic crisis now, consumers' income are falling and consumers are trying to increase personal savings in all ways possible, turning to cheaper alternatives instead of the traditional casket-service burial. This is equivalent to a change in consumer preferences, as more people start to accept cremation (which is much cheaper) instead of the traditional funeral. The change in consumer preference means that consumers now view cremation as a close substitute for tradition funerals, so traditional funerals are no longer deemed as necessities. Thus in this current situation, the demand for proper funeral services falls more than proportionately with the fall in income, making funeral services income elastic, Ey > 1. Hence firms need to come up with ways to cope with this new situation, for example offering no-frills cremation services to cater to those customers looking for cheaper alternatives.
The availability of cremation as a close substitute to the traditional funeral service also means that the demand for traditional funeral services is now more elastic than before.]

'Cremation cuts out the three most expensive pieces of a funeral: the casket, the embalming process and the grave plot. Industry critics say that as consumer preference has shifted toward cremation, funeral homes are jacking up prices in an attempt to preserve profits in a declining market... The numbers suggest that's true: from 2000 to 2008, the price of a casketed funeral rose 30 percent, according to the National Funeral Directors Association, whose members claim the spiking costs of raw materials that go into caskets, like steel and copper, are largely to blame.'

[The fall in demand for traditional funeral services - leftward shift of demand curve - causes the new equilibrium price (and quantity) to be lower, so the area under the demand curve at the new equilibrium price is smaller than before. This means that the total revenue for the firms have decreased, hence lowering the firms' profits, or even causing them to make a loss. As a result, the suppliers are trying to raise prices so as to 'preserve profits in a declining market'. They claim that the rise in prices are due to the increase in prices of raw materials, which increases their costs of production. In other words, the rise in prices of funeral services are supposedly due to the leftward shift of the supply curve, which means the leftward shift of the supply curve is more than the leftward shift of the demand curve. However, whether the firms will make more profit by raising prices remains to be seen as it is dependent on the new price elasticity of demand for funeral services, which is definitely more elastic than before, as mentioned above. Hence the firms may end up not making more profits either.]

'In fact, he (Tom Macksoud, who runs a no-frills cremation business called Simple Funerals) recently trademarked the name Simple Funerals to head off competition. Business is already significantly exceeding his expectations... as more clients opt for a quieter, thriftier way of death.'

[There is a high possibility that more such businesses will enter the market due to the high demand of no-frills cremation services. For such potential rival firms, the cross-elasticity of demand is > 1. Trademarking the firm's name is a way of service differentiation and to create customer loyalty and reputation. If Simple Funerals has a better quality of service, customers will prefer to get its services and recommend it to others. So if rival firms slash prices, the effect on the demand for services from Simple Funerals will not be too great, so that Simple Funerals will not need to slash prices by too much. Hence, trademarking the name of the business is a way of staying competitive in the market.]

Hope my rambling is understandable! Comments are welcome :)

Cheers!

yingda

Proposal for third medical school revived.

NTU and govt agencies in talks, as shortage of doctors grows more acute

By Amresh Gunasingham

The Straits Times Friday, March 27 2009 Page A4

SEVEN years after the idea was shelved, a proposal to set up a new medical school at Nanyang Technological University (NTU) is being revivied.

NTU Provost Professor Bertil Anderson told The Straits Times that discussions are again under way with government agencies.

"It is need-driven," he said, explaining that the greying population and the need for medically trained researched would make Singapore's chronic doctor shortage even more acute in coming years.

[The demand for doctors is a derived demand for medical services. In this article, there is a rightward shift in the demand curve because of the change in age composition of the population in Singapore. As the number of elderly people increases, the demand for geriatric medical services rises. Furthermore, the Government’s policy to make Singapore a medical hub will also cause the demand for medical researchers and doctors to increase.]

The cost of setting up the school and how many doctors will be trained is still being worked out, he said.

The Straits Times also understands that a senior faculty member from the famous Swedish medical university Karolinska Instituition (KI) has been seconded to NTU as a special adviser on the project.

Back in 2002, an international panel reviewing medical education here urged the Government to set up a school at NTU to produce another 100 doctors a year.

While other suggestions were taken up, like upping intake at the National University of Singapore (NUS) and setting up the Duke-NUS Graduate medical school to create more doctor-researchers, the Health Ministry decided there was no immediate need for a new medical school.

Earlier this week, however, Education Minister Ng Eng Hen said in Parliament that the Education and Health ministries (MOH) were working together to examine Singapore's medium and the long-term healthcare needs. One of the options being looked at is establishing another medical school in Singapore, he said.

Singapore aims to improve its doctor-to-patient ratio so that the healthcare system can match that of other developed countries like the United States. The public sector currently employs 4,300 doctors, but there is a need for up to 600 more to be trained locally.

[The supply curve of doctors is vertical because goods with quotas in production cannot change the quantity supplied. This means that the fluctuation in the price of the medical services provided will not affect the quantity supplied of doctors. However as the quantity supplied is curently much less than the quantity demanded at initial equilibrium, there is an acute shortage in doctors in Singapore. The shortage of doctors results in an inadequate quantity of medical services provided. This underproduction of merit goods (in this case, the services provided by doctors which are deemed socially desirable and under-consumed) will consequently cause the marginal social cost to be greater than the marginal private cost. This means that there will be an external marginal cost incurred which will cause a strain in consumer welfare and that the society welfare is not maximised. Hence, there will be negative externalities incurred in this situation. For example, some illnesses may not be treated in time due to the shortage of doctors available locally and individual health is compromised or even neglected. This results in a partial Market Failure!]

Measures like widening the net for foreign doctors by recognising more overseas medical schools have helped boost the number of doctors in the public sector by 39 per cent from 3,100 in 2004.

There are also plans to up intake at NUS from 260 to 300 in two years, while the Duke-NUS facilty, whose inaugural class of 26 graduates in 2011, has doubled its intake to 50 students each year.

However, all this will not be enough, particularly with two new public hospitals adding another 1,256 beds by 2015.

Dr Fatimah Lateef, an MP for Marine Parade GRC, who raised the issue in Parliament this week, said a new medical school would give young people more opportunities to take up medicine, and help groom future clinical researchers.

"There is a big gap between the number of applicants each year to NUS and the number of places available.

"If it does materialise, a new school would enhance Sinagpore's reputation as an education hub and is something a lot of people would welcome," she said.

Madam Halimah Yacob, chairman of the Government Parliamentary Committee for Health, however, called for a careful evaluation before embarking on what will be a multi-million dollar endeavour.

[As such, government interference is needed for the correction of the market failure of the services provided by doctors in Singapore. Subsidies provided by the government to train more doctors locally will increase the supply of doctors. However this is a long-term measure which will take some time to see the effects on the market. A faster solution is to 'import' qualified doctors from overseas to boost the doctor-to-patient ratio in Singapore.]

"Do we need another medical school if the question to address is merely increasing the supply of doctors?"

"Or can we look at expanding the capacity of the present medical schools?"

NTU professors told The Straits Times that a medical school school at the university would be complemented by its strong engineering focus, allowing greater scope for research in the bioengineering field.

~ XinYi :)