Question

The car and motorcycle population will not be allowed to increase from next February, with the Land Transport Authority announcing yesterday that it will no longer be factoring in growth when setting the certificate of entitlement (COE) quota.

Currently, it factors in a growth rate of 0.25 per cent per year.

The LTA had hinted at such a move previously, and said yesterday that it was proceeding "in view of Singapore's land constraints and our commitment to continually improve our public transport system".

Motor industry players said the change would likely push up COE premiums.

The LTA also said yesterday that there will be fewer COEs available for all vehicles except motorcycles for the November to January quota period.

----------In this article,

Explain how the concept of the scarcity applies in this example;

Draw the supply and demand curves before and after the policy change; and

Explain what you think is likely to happen to the price of the COE after the policy change is implemented.

Answer 1

It appears that the authority has reduced the number of certificate of entitlement (COE) it issues to the commutors. The increased restriction on the number of certificate of entitlement (COE)s will be indicating a decrease in the supply of certificate of entitlement (COE) in the market for COE.

Question: Explain how the concept of the scarcity applies in this example

When the supply of a particular good or service is reduced, there is a shortage in supply and this makes the product or service scarce. Resources are scarces when they are limited in supply and this gives us an opportunity to use the resources in different alternatives.

Question: Draw the supply and demand curves before and after the policy change

Demand and supply curves are drawn below. The initial equilibrium has a premium priced at P0 and number of COEs are Q0. The policy changes the equilibrium to a higher premium at P1 and a lower COEs at Q1

Question: Explain what you think is likely to happen to the price of the COE after the policy change is implemented.

Here the reduction in supply of certificate of entitlement (COE), would push the price/premium up because the commutors will be willing to pay a higher price for a scarce good. This is what the motor industry players said that this would likely push up COE premiums. The authority also predicted that there will be fewer COEs available for all vehicles except motorcycles