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.

What do you think is the key motivation for the government to charge ARF and COE? Why would it be effective?

How would ARF and COE affect the demand/supply and equilibrium price of cars compared to a market without these governement policies? Please focus on the economic reasons.   

Answer 1

The answer is that the state is attempting to curb the car population by pushing prices upwards & making vehicles more unaffordable. The idea of a taxation is to make customers & firms pay the total social cost of generating pollution. The SMC of producing the good is more than the PMC. The variance is the external cost of pollution. The taxation shifts the supply curve upwards & thus , customers are compelled to pay the total SMC. This lessens the quantity demanded to the socially efficient outcome (as the SMC equals SMB). The benefit of this is that the state raises considerable revenue, which could be utilized to fund other pollution reduction programs

A car is taxed no less than 100 % of its open market value in Singapore & there is also a COE, the payment of which drifts with demand.

The government levies taxes on car owners, primarily as a method to restrict traffic levels and pollution, as the Singaporean city is so dense.

This system implies that only approximately 15 % of populace own a vehicle .It keeps the streets quite unblocked for such a small-sized island & aids in keeping it one of the greenest urban regions in whole of Asia.

But the high price of vehicles is producing tension in a nation which has one of the broadest divides between well-to-do & destitute in the world.