Market failure

  • Factors affecting choice of policies

  • Nature of good

  • Budget of govt

  • Unintended consequences (e.g. subsidies to moral hazard, tax- losing X competitiveness esp if it’s major GDP contributor of cty)

  • Possible govt failure (e.g. X-inefficiency, estimation issues regarding externalities)

  • Root cause (imperfect info VS ext)

  • Opp cost

  • Severity of market failure (severe, blunt tools like ban) (if not so severe, mkt0based soln – tax/subsidies allow free mkt to work to some extent, lessen burden on govt)


Info failure (NOT ext) – policies

  • Imperfect info

  • E.g. persuasive advertising (MPB perceived > MPB actual)

  • Asymmetric info (moral hazard + adverse selection)

  • E.g. Healthcare insurance/job hiring market/used car mkt

Healthcare – imperfect info =/= healthcare insurance – asymmetric info


Public goods VS merit goods (complete VS partial mkt failure)

Merit goods: excludable & rivalrous *give e.g.

*relate to MC=0 or not & if there are free ridership problems or not


- *should/can/must govt intervene?

Should – under-consumption & welfare loss

Must – no

Partial mkt failure – free mkt can still provide (not same as public goods)

Can – X-inefficiency/budget constraints/opp cost


Opp cost & mkt failure (diff btw govt, social optimal lvl and priv social optimal lvl)


Rational Decision Making


  • How private rdm differs from regulators (govt)


Ref: RI 2017 Q3, HCI 2017 Q1, RVHS 2017 Q1, DHS 2017 Q3




KEI + Income Determination / SOL

  • Alternative indicators

  • Link to sustainable and inclusive growth (traditional measures no longer enough – alternative indicators needed)

  • E.g. Gini coeff – inclusive growth

  • E.g. PSI levels – sustainable growth

  • High growth rates at all costs desirable? – Depend on state and nature of economy, developing (worth it – infrastructure, employment) VS developed

  • Trade off actual and potential growth (progressive tax)

  • Traditional indicators of GDP, CPI, Unemployment rate, BOP (how to access economic performance based on this)

  • *elab on how they affect one another & purpose ((+) consequences of achieving them & (-) consequences of not achieving them)

  • SOL

  • Material + non-material - Possible trade-offs btw each

  • Material – real and per capita

  • Comparing btw countries: PPP ER and common currency

  • Traditional ec perf indicator – are they enough to ascertain SOL?

  • E.g. high GDP stress lvl high – worth it?

  • Size and openness of economy/globalisation – impact on SOL (beneficial or not)

  • E.g. higher GDP at expense of pollution (micro/macro trade-offs)

  • E.g. globalisation – no inclusive EG, wage differentials (wage gap btw high & low skilled indiv)

  • Economic performance =/= SOL

  • Ec perf: Assessment based on 4 macro goals


Ref: TYS 2014 Q5, 2012 Q6, 2011 Q6, 2009 Q5, RI Q4 2016, 2017, 2015






4 Macro Goals and Policies

  1. Deflation

  • Root cause: fall in AD, increase in LRAS + SRAS

  • Desirable and undesirable deflation depends on state of economy (draw AD/AS diagram)

  • Policies depend on root cause of deflation

  • Consider falling commodity prices such as oil on deflation (use AD/AS diagram)

  • Relevance of SG’s MAS ER policies to prevent deflation

  • *Price stability: inflation + deflation

  • Diff economic impact on diff stakeholders/economic agents

  • Creditors VS debtors, fixed and variable income earners

  • Impacts on other macro goals (depends on root cause of deflation)

  1. Economic Stagflation

  • Fall in AD + cost-push inflation

  • Root cause + consequences + policies (refer to stagflation + policies doc)

  • SR VS LR policies diff

  1. US i/r hikes implications on themselves and their trading partners (may not come out)

  2. Inclusive growth + sustainable growth + policies

  • Trade-offs in actual and potential growth

  • Depends on developmental stage of economy, not all economies can afford to pursue sustainable and inclusive growth

  • E.g. Developing nations could have diff priorities such as actual growth due to spare capacity

  • As an economy develops over time, i.e. china 20 yrs ago compared to now, would have diff priorities in their 4 macro goals as well as growth engines will change



Market Structure/Firms

  1. Contestability, an alternative perspective to large firms

  • Improve on behaviour and desirability of large firms

  1. Oligopoly – Behaviour and Performance

  • Goal of firm

  • Degree of govt intervention

  • Relating to case of how oil firms have increased output and lowered their prices, showing switch in objectives (profit max à growth max)


Ref: RI 2015 Q2


Objectives of firms

  • Profit-maximising objective

  • Alternative objectives (Entry deterrence, revenue maximisation, profit satisficing, and market share dominance)

  • Considerations involved in firms’ decisions and strategies to achieve objectives including cost and revenue, competitors’ actions, in context of business risks, uncertainty considerations (uncertainty could be firms’ behaviour in a recession, e.g. merger to prevent shutdown, may be desirable

  • Decisions and strategies including price and output, price discrimination, shut-down decision, growth of firms, diversification, innovation, product differentiation, competition vs collusion


Impact of decisions and strategies and Government Intervention

  • Impact of decisions and strategies on consumers (C surplus for price), firms (rev + profits) and governments (tax rev collected/subsidies given for infant industries), including efficiency and equity, and consumer welfare

  • Market Dominance (depends on type of monopoly – artificial/natural Ref: RI 2016 Q2) and Government Intervention

  • Methods of Control (MC pricing for efficiency/lump sum tax for equity/deregulation to directly reduce mkt dominance/nationalisation and the concept of X-inefficiency – suitability depends on nature of gd e.g. pharmaceuticals may not be suitable for nationalisation as it requires substantial R&D)


  • Explain the significance of variable costs and irrelevance of fixed costs in the shut-down decision of a firm in the short run

  • Explain the various sources of internal and external economies and diseconomies of scale and how they affect a firm’s production and cost in the long run

  • Explain how firms grow, why they choose to grow and what determine the size and number of firms in a market

  • SR: AR>AVC

  • LR: AR>all costs


  • Discuss the performance of firms in each type of market structure (in terms of short and long term profits, equity, allocative efficiency, productive efficiency and dynamic efficiency) based on their behaviour (pricing & o/p decisions)


Small and large firms can coexist together

  • Banding: share cost with other firms (bulk purchase) - constant returns to scale

  • DD/SS factors - why they coexist

  • DD: T&P

  • SS: small prod as the more they produce, the more dis EOS they have


Why oligopolies prevail in SG

  • Due to price stability and supernormal profits to produce value-added G&S

  • Globalisation and an alt perspective on large firms (contestability)





  • Benefits and costs based on sixe and openness of economy

  • Assess 3 flows: labour (migrant workers), trade flows, capital flows (FDI)

  • Relevance of anti-globalisation policies in relation to the 3 flows

  • Assess effects based on 4 macro goals and impact on diff economic agents in the country

  • Nature of economy, size and openness, ability to use anti-globalisation policies differ

  • Alternative policies to reduce reliance on FDI and migrant workers (case of SG)

  • E.g. SME funding – SPRING SG, foreign worker levy, increasing productivity of domestic labour, quota system for hiring of foreigners

  • Foreign worker levy and cost-push inflation (shortage of migrant workers – wage-push) in the country – link to loss in growth competitiveness

  • Use of tariff diagram to explain restriction to trade flows

  • Diversify FTA and CA

  • Offshoring (case of China) - alternative methods to build foreign reserves, reduce possible retaliation, acquiring of overseas assets, tap onto foreign labour market w/o depletion of own country’s resources


Pattern of Trade

  • In view of volume, composition and direction how FTA/protectionism/govt policies/tech changes/globalisation/factor mobility (occupational/geographical immobility)/dynamic CA can affect pattern of trade

  • Govt policy: ERP, FTA, SS-side policies

  • Offshoring affecting pattern of trade – intra-industry trade argument


Ref: RI 2015-1017 Q6, RVHS 2017 Q6