Question

Singapore cars are the world’s most expensive. A main reason is deliberate government policy. Buyers must pay several levies on top of the basic price for a car, including the “Additional Registration Fee” (ARF) and “Certificate of Entitlement” (COE) on new car registrations.The ARF is based on the wholesale cost or import price of the car, which is officially called the “open market value” (OMV). The COE is essentially a vehicle quota system where people bid for a certificate to own a vehicle. A new car may be registered only with a COE, which is valid for ten years.

Despite the high prices, we observe more luxury cars on the street of Singapore than in most US cities. Why? Are American consumers more frugal than Singaporeans? Focus on the economic reasons

Answer 1

Singapore has become famous for topping charts as the world’s most expensive city, more than once. Among other costs of living what grabs the most attention is the ridiculously over-expensive journey associated with owning a car. Additional Registration Fees (ARF), Certification of Entitlement (COE) etc are additional expenses over and above the price of a car, which every Singaporean buying a car has to incur. A COE is moreover not valid for a lifetime. It’s valid for only 10 years. Despite all these factors, the number of luxury cars is more in Singapore than in USA. This can be explained on the basis of the following points:

• Firstly, any economic reason is closely related to geographical statistics. Singapore is relatively very small, with a much lower population than USA. When an area is relatively small, the distance commuted within that area is also lower. The need to own private cars is much less in Singapore than in USA. Thus, only the affluent ones in Singapore, who can own cars, choose more luxury cars over economical models.
• Secondly, citizens of Singapore are benefitted largely by the well connected and extremely economical means of public transports like trains and busses. Spotlessly clean transport systems with fully air-conditioned travel make commuting with comfort very easy. Longer distances are covered at lower costs. However in the US, people living in smaller or remote cities do not have access to a very well connected public transport, like New York City does. Thus it is a necessity for most Americans to own cars, whereas it is a luxury for Singaporeans. Naturally, if more number of people are owning cars in USA, middle-class families will mostly choose economical cars with more mileage rather than luxury models with high maintenance. On the other hand, the rich Singaporeans choose to buy luxury cars and take them out as and when required rathjer than for daily long-distance travel.
• Thirdly, good governance and a largely rule-following population in Singapore makes its standard of living higher compared to that of USA. One might be wondering why this point is relevant. This is because, most of Singapore believes in spending on necessities first and luxuries later. Inequality is much lower in Singapore and this allows them to buy luxury cars after having taken care of all the necessities. Since owning a car is not a necessity in Singapore, if at all someone buys a car, they’d go for luxury cars because being luxurious is the priority for people enjoying surplus savings after spending on necessities ; not being economical and saving on transport expenditure, unlike in USA.
• Lastly, from a microeconomic point of view, the law of diminishing marginal utility works in helping consumers make choices. Owning a car gives much higher utility in USA than not owning a car at all. However, since the purpose of a car is served very well by economical models, the marginal utility derived from buying a luxury car isn’t much higher (and in fact is sometimes lower) than owning an economical model. Therefore, smaller and non-luxury cars are a better choice for Americans. On the other hand, owning a car is not necessary in Singapore. Thus the marginal utility from owning a small car in a densely-populated area is not much higher than the marginal utility of commuting through public transport. However, when one can afford a car which doesn’t require daily use, the marginal utility derived from buying a luxury car is much higher than the marginal utility from buying an economic model (or buying no car at all). Therefore, luxury cars are a better choice for citizens of Singapore.

In conclusion, what is most important to remember is, Singapore doesn’t have a higher number of cars than USA per se. What it does have is a larger number of “luxury cars” than USA. The number of cars in USA is much higher than that in Singapore with economical models taking up most of the share of cars in USA. Thus, it can be said that American consumers are more frugal, strictly referring to USA consumers as being more rational and economical than citizens of Singapore. Basing consumption decisions on rationality and need, Americans move away from luxury cars and are biased towards economical cars. This is the smarter thing to do for USA. There is a common saying, “Cut your coat according to your cloth”. USA is doing just that when it comes to buying cars.