1.

“When prices are volatile it is in the best interests of both consumers and producers for
governments to control and moderate that volatility.”
a. Examine and illustrate why the prices of some goods are more volatile than the
prices of others. (10)
b. Given their role in resource allocation, is it best for the government to accept
whatever volatility of prices may occur in a free market?

2. “Monopolistic competition is the worst of all possible worlds, failing to achieve either the
pricing efficiency created by the intensity of perfect competition or the scale economies
and innovation of oligopoly and monopoly.”
a. Explain what is meant by monopolistic competition, and why the majority of firms in
Singapore are operating in such a market. (10)
b. Does the existence of so many monopolistically competitive firms lead to inefficiency
in the Singapore economy? (15)

3. With an aging population and an ever-increasing demand for health services, there is a
growing recognition and a fragmented and specialty-centric model of health care provision
would do little to improve the cost, quality and access of health services, especially for the
elderly in Singapore. - Singhealth, Healthcare Roundtable VI, 1 Feb 2008

Discuss the economic reasons to support your arguments, whether the Singapore
government currently adopts the most appropriate economic policies in the provision of
healthcare. (25)

4. Assess the view that in a small open economy like Singapore, demand management
policies are largely irrelevant, and therefore governments should focus their efforts on
supply-side policy-making.

5. Consumer price inflation in Singapore rose from 1.0% in 2006 to 2.1% in 2007 and 6.5
% in 2008. Consider whether exchange rate policy is the most effective way to ease
inflationary pressures in Singapore. (25)

6. “Modern protectionism is more subtle and varied than the 1930s version where tariffs
were the weapon of choice.”
a. Describe the different forms of protectionism in practice today. (10)
b. Evaluate the arguments for protectionism in light of the current economic downturn.
(15)

Q1a)

Price determined by demand and supply

price volatility - due mainly to price inelastic demand and price inelastic supply of

price inelastic demand - low responsiveness of qty dd to change in price. Primary goods,
e,g, agricultural goods, fuel oil.
Reasons for low PED: Basic products rather than luxuries, e.g. food. OR no close
substitutes.
E.g. computer games, rice, traveling, manufacturing vs. primary good
 COMPARED TO jewelry, coca cola...

Fig 1: market for Good A - elastic demand, supply shifts upwards, indicate price changes
Fig 2: Market for good B - inelastic demand, supply shifts upwards, indicate price changes

show:
- price volatility when supply shifts
- indicate why there is different in price elasticity of demand - HITS, apply to certain goods
(recreational games vs. rice or staples)

Price inelastic supply - low responsiveness of qty supplied to change in price

E.g. agricultural goods, fuel oil
Reasons: long gestation period, uncontrollable weather conditions, non-renewable (fossil
fuel)
COMPARED TO manufactured goods - e.g. computer game software, PES relatively
higher; relatively easy to increase production by increasing inputs

Low price elasticities of demand and supply will result in large extent of price changes
when demand (or supply) conditions vary.

- Draw graph of primary product market (where dd and ss are both price inelastic) vs.
manufactured product market (where dd and ss are both price elastic)
- show the shift, and the differences in price

For a given good, the different market structure may have an impact on the volatility of
price.
E.g. fr a given increase in demand for computers, a monopoly or oligopoly will be able to
respond in supply because it may have excess capacity as compared to a PC firm which
does not have excess capacity. Also these dominant firms have greater control over price
and output and are unlikely to allow volatility in its market.

b)

Thesis
Let price mechanism allocate resources efficiently. Explain how the price mechanism does
that.

Anti thesis
Sharp increases in price may cause goods, esp necessity to be out of reach for the lower
income-inequity
E.g. sharp increase in price of rice - need for govt. intervention - subsidy or
maximum/minimum price

3.IMPORTANT IMPORTANT!

Explain sources of market failure in Singapore in healthcare

Discuss the effectiveness of policies used in Singapore (Thesis and anti-thesis)
 Market failure - The free market forces lead to misallocation of resources. 3 possible
sources of market failure in healthcare provision:
- +ve externality
- imperfect market
- inequity

Positive externality
Use of healthcare leads to external benefits to third party not involved in the consumption
Healthcare is very wide ranging, from treatment in OPD, hospitals to preventive
healthcare. use vaccine to illustrate.
- vaccinated against chicken pox, polio
- there is spillover effects to third party
- others not vaccinated benefit in the sense that he will not contract disease from
vaccinated and therefore reduced chance of falling sick.

OR

Example, in medical screening - early diagnosis of illness leads to early treatment -

reduced spread of diseases - healthy population - increased labor productivity of nation as
a whole.

MSC-MSB framework
- cost or benefit vs. amount of vaccinations
- shift + show the junctures as alphabets
- assuming you can place a monetary value t these external benefits, MSB > MPB at every
level of vaccinations.
- Benefits to society > private benefits by the amount of external benefits BC.

market at initial c
producers/consumers don’t take into account externality

Govt intervention
Subsidy
- subsidy to newborn babies and school children vaccinations against polio, chicken pox
- subsidy for medical screenings at poly clinics especially for the elderly, blood test for
cholesterol, diabetes etc.
Legislation - compulsory for babies to be vaccinated against certain diseases like polio,
rubella etc
Public education - information dissemination through schools, medical centres or mass
advertisement on the benefits of vaccination, e.g. chicken pox, flu, hepatitis A, B.

The above will cause the demand for healthcare services to increase. External benefits

imperfect market
Healthcare services provided mainly by op clinics and hospitals.
Market power - reduced output, higher price
 Easy for patients to be exploited because of the nature of service

Use example:
hospital medical services - oligopoly
high BTE for hospitals - high start up cost, highly specialized medical personnel.

Market power - the control of price or output by a firm in order to maximise profits

A hospital faces a downward sloping demand curve DD and MR

(show graph depicting imperfect comp and how Qm is lower than Qpc)

Profit maximisation output level

The hospital seeks to max profits at Output Qm, where MC = MR

charges price (Pm) > MC of producing it

- society values the additional units of products/services higher than it values the
alternative products that these resources could otherwise produce.
- not allocative efficient

Consumer welfare reduced in terms of higher price, lower output:

- oppo

Consumer welfare further reduced in terms of:

imperfect information, especially in specialized field of medical treatment. Easy for patients
to be exploited
- appropriate medical service needed, quality of medical services
- non- availability of published rates

Inequity issues arise where resources may be directed only to providing for the rich, for
e.g. aesthetics, plastic surgery.
And away from basic healthcare for the poor who are not able to pay.

Govt intervention
Increased competition
- allow more private hospitals/medical centres to be set up, including increase in no. of
public hospitals
- Provisions: public hospitals at subsidized rates Class B and C/ unsubsidized rates - Class
A
- increased intake of medical students or allow foreign doctors to practise
- Spore Medical council - watchdog for medical malpractices.
- Legislation requires hospital to publish rates

Limitations
- provision of pubic hospitals very costly
- Training doctors drain on finances
- Foreign doctors - may not be suitable
- Published rates are only a guide, no. 2 treatments are identical. Hard to compare.
 Other issues and policies
Fast ageing population, healthcare for the elderly:
To ease the financial burden of govt. on elderly healthcare, govt. look to the individual,
family and community
- compulsory medical savings in CPF
- Legislation are in place to ensure parents are taken care of by children and community
hospitals are run by charitable organizations like the Ren Ci Hospital, the St Andrew
Community Hospital and the upcoming Khoo Teck Phuat Hospital
- Promotion of healthy living to ensure a healthy population, a work-life balance.

Conclusion:
Healthcare provision - wide ranging, problems are multi-facet.
Spore govt. has a very comprehensive package of policies to deal with the issues.

Qn 4 INFLATION MIGHT COME OUT

Intro:
- small open economy like Singapore (explain)
- Singapore illustrations expected
- related to the attainment of economic goals (4 macroeconomic goals, equity)
- State demand management policies (FP, MP, Exchange rate policy)

Body:

Thesis: demand management policies have little relevance for SOE, SS-side policy better
employed

- Given small size of domestic sector of the economy, G and domestic C small relative to
X, M. (Significance: dependence on export-led growth)

(include AD-AS diagram - demand shifts)

- High degree of reliance on external sector - high MPM - small K - limited effectiveness in
FP, MP as a counter-cyclical measure in stimulating NY, growth and employment as a
response to cyclical downturns associated with a fall in AD. (AD-AS diagram to illustrate)

- Openness of economy - reliance on FDI and X-led growth - choice of free capital mobility
(short-term hot$ and Long-term FDI) and exchange rate stability (in view of the high
degree of trade-reliance of the economy) means giving up control over MP.

- Exchange rate policy more effective as compared to MP and FP as it can directly affect
(i) X competitiveness and (ii) help to counter imported inflation in view of the trade-oriented
nature of SOE like Singapore.
E.g. in response to an export-led economic downturn, in SR, exchange rate policy of
depreciation can be used to improve export competitiveness, assuming PED>1 for X,
more than proportionate increase in Qd for X --> increase X revenue, ceteris paribus, raise
BOT value and AD --> stimulating NY, economic growth and employment.
 Given limited scope for use of DD-mgt, explain use of alternative policies like SS-side
policies; supply side policies are multidimensional and some of the following are unique to
Singapore.

- Expenditure on infrastructure, R&D, training

- Prices and Incomes policy
- Defence of property rights especially IPR toe encourage private sector R&D
- Introduction of flexibility into labor markets via NWC flexible guidelines on pay and
bonuses and employer CPF contributions (Singapore)
- Avoidance of supply distortions from minimum wages or strong Trade unions (Tripartite
system in Singapore)
These policies may be effective in the context of a SOE where consideration of MNC
FDI is important and wage flexibility works better than in larger economies. But they are
slow to act.

- Explain how the above SS-side policies (both mkt-oriented and interventionist) help to
promote potential growth, dampen cost push inflation and raise employment. (AD-AS
diagram to illustrate)
Evaluate effectiveness of SS-side policies.

Anti-thesis: demand-mgt policies has scope for intervention as a SR counter-cyclical

measure and to achieve equity objective.

- in the case of a severe export-led decline in economic growth and employment like in the
current economic situation for SOEs, DD-mgt policies necessary as a short -run response
to stimulate the economy and mitigate the fall in economic growth and employment.
Explain the use of FP and/or MP as short-term stimulus measures.
- The objective of economic management also need to address issues of equity. Demand
management FP offers opportunities to operate on demand whilst targeting not just the
level but the composition of AD (between richer and poorer households).
- E.g Reduction of income tax rates as an expansionary FP can be calibrated to improve
also equity by cutting personal income tax rates more for lower income tax brackets than
for those at the top income tax brackets
- (Also richer households have lower MPC as compared to poorer households, more
effective in stimulating C of poorer households)

Conclusion: SS-side policies main thrust of economic management in Singapore given its
beneficial effects of sustaining economic growth in the long-run. Needs to be
supplemented by the use of DD-mgt policies which are better suited as short-run policy
response to situations of severe X-led decline in economic growth or to slow down
excessive X growth (through the use of X-rate policy) to maintain price stability.