PRICES VERSUS QUANTITIES IN THE REGULATION OF ECONOMIC VARIABLES IN SINGAPORE

Abstract

The recent controversy over the vehicle quota system in Singapore has brought to the forefront the issue of prices versus quantities as the optimal policy instrument for the regulation of an economic variable. It is the objective of this thesis to examine whether it is more efficient to use a price or quantity instrument to regulate an economic variable under various situations. Weitzman (1974) developed a cost-benefit model to explore the general belief held by most economists that price controls are more efficient than corresponding quantity controls. The choice between price or quantity control depends on the nature of the social cost and benefit functions. Assuming complete knowledge and perfect certainty of social cost and benefit functions, price and quantity instruments are equivalent. If the regulator is uncertain about the precise specifications of cost and benefit functions, implementing either instrument results in welfare losses which are non-equivalent. The choice of price or quantity instrument depends on the relative curvatures of the cost and benefit functions. Quantities are the preferred planning instrument if and only if the benefit function is more curved than the cost function. Prices, on the other hand, are preferred if the benefit function is less curved than the cost function. In Singapore, the government has already implemented three quota systems, namely, the textile exports quota (in January 1988); the chlorofluorocarbon s(CFCs) quota (in August 1989) and the motor vehicles quota (in May 1990). A foreign worker quota system was endorsed after by Parliament in March 1991. In the 1970s, the Singapore government relied mainly on price schemes such as the Area Licensing Schemes (ALS), the Additional Registration Fee(ARF), the Preferential Additional Registration Fee (PARF) , as well as import, fuel, and road taxes to regulate motor vehicle growth. The ARF was increased four times between 1970 and 1983, from 15 per cent to 175 per cent of the open market value of a car. At present, the foreign worker levy is used to regulate the employment of foreign workers. The levy has been adjusted six times between 1980 and 1990. The levy for non-domestic foreign worker was $250 per worker per month in July 1989 and $300 in August 1990. For foreign domestic servants, the levy was increased from $200 in July 1989 to $250 in August 1990. In order for the price instrument to be effective, the tax or levy must be revised periodically. Given this disadvantage, the government has shifted in favour of a quota system to achieve various policy objectives. However, it has brought other inefficiencies, for example, higher car premiums because of overbidding, greater resource loss in rent seeking behaviour, arbitrage efficiency losses due to the regulation on the transfer of Certificate Of Entitlements (COEs), and higher administrative costs.