Marcus' Answer to Ms Chai's Question

Tobacco is a demerit good

Market failure refers to either an underproduction or overproduction of a good due to positive or negative externalities.

Market failures associated with cigarettes is air pollution, health problems and addiction. For air pollution, the smoke from the cigarettes will pollute the air incuring social costs not included in the private marginal costs thus it is a market failure For health problems, smokers who smoke will give off second hand smoke which can cause lung cancer in other people who do not smoke. This means that money has to be spent to cure these people. However, this costs is not included in the private marginal costs thus there is market failure. Furthermore, there is addiction which will cause stress problems to the family or colleagues at the workplace. These would cause decreases in efficiency and a drop in the work quality. This is not accounted for in the private marginal costs thus it is market failure.

The Singapore government has intervened to correct the market failure by imposing taxes on cigarettes making it more expensive for consumers as the price elasticity of demand for cigarettes is inelastic, therefore most of the tax increase will be absorbed by the consumers. Furthermore, the singapore government has also imposed compulsary advertisements on cigarette packets to influence consumer's choice and preferences. Warning consumers of the negative effects of cigarettes, ensuring that consumers have better information when buying cigarettes.

Question of the Week

Ms Melissa Chai's Question of the Week

What type of good is tobacco?

• Explore the market failrues associated with cigarettes.
• How has the Singapore government intervened to correct the market failure?

>:D

Why the Government Chooses to Open the IRs

Gambling has evolved along with the advancement of technology in the last 10 to 20 years. With the internet, online betting companies and casinos have sprouted up. This allows for almost anyone to have access to these sites, and play anonymously. On the stock market, these gambling companies have steadily risen in their stock, signaling a growing market. Not surprisingly, the Singapore government has also learnt to capitalize on this, introducing the Integrated Resorts (IRs).

However, this trend brings along with it many hidden external costs. Gamblers are prone to addiction, and in gambling, there is no real generation of money. It is in fact just taking money from one man and giving it to another man who has won it. As a result, if there are winners, there will be losers. Addicted gamblers have a lower work rate, and efficiency is reduced at the work place. Furthermore, gamblers who have lost a lot of money are not the only ones affected. Their family and friends are also caught in their web of depression and desperation. This danger of addiction is greatest for the young people and those vulnerable to temptation. To help the problem gamblers who may go into debt or become bankrupt, a lot has to be spent on counseling and other activities. As such, the social cost of consumption is greater than the private cost, meaning gambling is a negative externality which has negative influences on society.

To deal with these problems, many state and national governments have introduced taxes to curb the problem of gambling. These taxes are placed on the casinos themselves, and part of this tax is passed on to the gamblers. However, because gambling is addictive, the demand is price inelastic. Thus, even taxing gambling does not necessarily solve the problem since many addicts will continue to gamble despite of the tax. In Singapore, the government has also considered imposing a $100 daily levy on citizens and PRs who visit the casinos, in hopes of deterring addiction. But because of the same reason as stated above, it will not be of much use. The main problem in gambling are the habitual “problem gamblers”. They are the ones who incur more social costs because of their severe addiction, and not the casual gambler. Thus, it would be more useful to target these “Problem gamblers” specifically. The Singapore government has done this by coming up with the idea of letting problem gamblers “exclude themselves” from the IRs by signing forms that allow IR operators to prevent them from entering the IR. Family members can also apply for the exclusion of any family member that may be a problem gambler.

In spite of the negative external costs that gambling has on society, the government still chooses to go ahead with the opening of the IRs. This is because, to the government, the social benefit is still more than the social cost. What the government can stand to gain from the IR is an estimated 35000 jobs being created, which would help solve underemployment or unemployment by allocating the labour resource more efficiently. This increase in jobs in turn stands to increase revenue. Furthermore, the IRs will attract even more tourists, evident from the casino cities of Macau and Las Vegas. This is vital to Singapore because the government predicts that manufacturers will gradually move out of Singapore to China or India. As a result, Singapore needs another avenue to maintain its growth. The government plans to triple tourism revenue to $30 billion by 2015 and the opening of the IRs would help in that goal.

In conclusion, even though there are severe negative externalities that can be expected from the IRs, the government believes that it can control them with proper measures, and also because the benefits from opening the IRs far outweigh the negative costs.

-Joon Fai

AHHH yes the long overdue econs blog.