As part of ALPHA programme activities, I signed up for the Economics Port Operations Learning Journey which took place on the 18^th of November. You may ask “How is Economics linked to Port Operations of Singapore?” I shall explain about that but before I continue, I shall explain briefly about the background of Singapore’s port.

Background
The port of Singapore was founded by Sir Stamford Raffles in the 19th Century. The 19th Century is well known to be the era of Industrial Revolution. Thus, during this era, there was an increase in consumer goods throughout the world. Goods were mostly produced at factories in large amounts and in its thousands. As a result, to meet the rising increase in demand for goods, more raw materials were needed which means people at that time often sail to other countries to obtain raw materials to continue producing their goods.

Initially, Raffles opened at Port at Penang and made it a free port. However, the location was unsuitable for traders to travel to. Thus, Raffles had to scout for a better location and that place was Singapore.

The reason why Singapore was better than Penang in the 19th century is because of it’s strategic location and accessibility. Singapore is located in between Indian Ocean and the Pacific Ocean. If there are ships that need to travel to Thailand, Bangladesh, India and Europe, they can sail past Singapore via the Western Anchorage and if there are ships that need to travel to Hong Kong, China, Japan and America, they can do so via Singapore’s Eastern Anchorage. Singapore’s position as a port made it easier and possible for immigration to occur in the 19th and 20th century.

Therefore, Today, since Singapore is situated in between the Indian and Pacific Ocean, this makes Singapore a strategic place for Ships to re-fuel, transforming Singapore’s port into a Giant Patrol Kiosk. In this way, Singapore gets to experience economic growth as many ships are anchoring at Singapore to obtain bunkering services from Singapore’s port.

Some important facts before I continue: Shipping and Port Operations contribute up to 7% of Singapore’s GDP. This means that Singapore’s Shipping and Port industry is one of Singapore Economy’s important assets. Anyway, what makes Singapore’s port so attractive? This is because, Singapore has natural deep water habours (below-darker blue areas) attracting many ships to Singapore for bunkering, dredging and waste disposals. Singapore generate a hefty revenue from these 3 activities. Singapore is also the world’s largest container transshipment hub (shipment of goods or container to an intermediate destination, and then from there to yet another destination), handling about one-fifth of the world’s total container transshipment throughput, and 6% of global container throughput.

To relate to the GCE A levels economic syllabus, The giant players of this industry are PSA and Jurong Port (Duopoly Market Structure). 

                                   

PSA was formerly the The Port of Singapore Authority, and was part of the Statutory Board (Governed by Singapore Government). However, on August 25, 1997, a parliamentary bill was passed to corporatise the Port of Singapore Authority. PSA restructured into PSA International Pte Ltd. Currently, PSA is the largest Port operator in this region managing 4 container terminals - Tanjong Pagar (below-background), Keppel, Brani and Pasir Panjang. These 4 terminals once constituted the World’s Busiest Container Port moving 70,000 TEUs (Twenty footer containers) DAILY. In Singapore, PSA owns the largest market share as it operates 28 port projects in 16 countries across Asia, Europe and the Americas, with a global capacity of 111 million TEUs over 66 km of quay length. It has a network of 200 shipping lines serving 600 ports in 123 countries.These investments in other countries also help to increase Singapore’s actual growth. In addition, Singapore is also Dynamic Efficient having developed several in-house IT systems, including Computer Integrated Terminal Operating System (CITOS); Portnet; Flow-Through Gate; Remote-controlled Overhead Bridge Cranes; Collaborative Port Community Solution. These innovations are also forms of Technical Economies of Scale enjoyed by PSA. PSA is able to spread the fixed costs over as large output as possible using these technologies, so that Average Fixed Cost decreases. Furthermore, these technologies are also exported to other ports in the world, further increasing Singapore’s actual growth. 

On the other hand, Jurong Port (below-background) was set-up to drive the industrial estate development in Singapore and Jurong Port became a business division under JTC. On January 1, 2001, Jurong Port was corporatized and became a fully-owned subsidiary of JTC Corporation. Unlike PSA which focuses only on containerization, Jurong Port is the only multi-purpose port in Singapore, handling bulk and breakbulk cargo besides container cargo as well. In addition, Jurong Port is also a key player in the manufacturing oil rigs which are then exported all over the world (product differentiation). These strategies also help increase Singapore’s actual growth.

 

Even though both PSA and Jurong Port handle containerized cargo (similar product), However, PSA has a larger market share because it welcomes over 130,000 vessel calls annually while Jurong Port only welcomes 35,000. Despite competing with each other, both PSA and Jurong Port are still closely monitored by Government body - MPA (Maritime and Port Authority of Singapore).

Summary on why Singapore’s Ports are one of the best in the world
1) Singapore has an active trading and assembling industry.
2) Singapore is a popular port because its waters have a depth of 40-50m deep - suitable for ocean-going vessels. This also means, Singapore ports provide enough capacity for Big Ships.
3) Singapore’s Shipping industry is a value-added industry. Even though Singapore does not have raw materials, we have the means to package and assemble small parts into bigger items and machinery.
4) Singapore’s ports are also one of the safest in the world and has a good safety record - no pilferage!
5) Singapore’s attractive because it has a large customer base and better and advanced technology operated in its ports as compared to other ports in the world.
6) Singapore’s ports has a good and strong reputation. Many foreign ships prefer to register under the name of Singapore and follow Singapore’s regulation. This is because Singapore’s ports are corruption-free.
7) PSA and Jurong ports employ workers that are highly skilled and efficient 

I hope this knowledge benefit those reading [: 

 Shaik Nabil, 10A03

 iPod is a portable media player designed and marketed by Apple and launched on October 23, 2001. The product line-up currently consists of the hard drive-based iPod Classic, the touchs creen iPod Touch, the compact iPod Nano, and the ultra-compact iPod Shuffle. iPod Classic models store media on an internal hard drive, while all other models use flash memory to enable their smaller size (the discontinued Mini used a Microdrive miniature hard drive). As with many other digital music players, iPods can also serve as external data storage devices. Storage capacity varies by model, ranging from 2 GB for the iPod Shuffle to 160 GB for the iPod Classic. All of the models have been redesigned multiple times since their introduction. The most recent iPod redesigns were introduced on September 1, 2010.
In Singapore, iPods are very widely used. For every 1000 steps you take, you’ll spot at least one person using an iPod. Yes, that’s how popular iPods are. So, have you guys ever wondered what type of market structure Apple Inc is operating in? Well, let’s find out.
For this, I will assume that we are discussing the market for personal digital audio and video media players. Keep in mind that music can be downloaded (legally and illegally) in numerous ways such as the iPod, smart phones and standard laptops. 
Apple’s iPod was launched in 2001 and in that time Apple has sold more than 180 million units. Quarterly sales worldwide continue to nudge between 9 and 10 million. Despite the entry of Microsoft’s Zune digital media player (launched in 2006, manufactured by Japan’s Toshiba) and existing players produced by the likes of Sony, Creative and Samsung, the Apple iPod continues to enjoy a market share of more than eighty per cent. In this sense, the iPod can be said to have a monopoly position in the market and well established market dominance.

(Microsoft’s Zune digital media player)
An important point is that the early generations of the iPod largely created a new market rather than displacing an existing one. And Apple’s strategy since then has been to innovate and deliver new products to the market that appeal to a new group of consumers.
Indeed there are those who claim that Apple has built up a vertical monopoly in this market based around the success of the iPod, iPod Shuffle, iTouch, iPod Nano with Apples iTunes software, the iTunes Music Store platform, and the FairPlaydigital rights management system (DRM). Until recently, DRM acted as a barrier to entry in the market because it prevented consumers who had purchased songs through iTunes from using them on digital players other than Apple’s own products.
In January 2009 Apple has finally made agreements with the big music labels to offer music free of DRM protection. As the Times reported in January 2009 “DRM-protected songs prevent music being copied — an option insisted on by recording studios — meaning that iTunes tracks could be played only on Apple products such as iPods.” iPod’s market position has been further reinforced by a mini-economy of accessories that have been released onto the market - from docking stations to headphones.
Oligopoly
Another view is that the different versions of the iPod compete within an oligopoly market structure.
An oligopoly is a market dominated by a few producers, each of which has some control over the market. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure. In an oligopoly we frequently see many of these aspects:
1) Periods of intense price competition between rival brands
2) Heavy investment in research and development to speed up product and process innovation
3) An emphasis on non-price competition as a way of gaining and protecting market share
4) The existence of entry and exit barriers which limit the number of businesses that can operate profitably in the market
The iPod fits fairly neatly into this type of market structure
(i) The use of patented technologies such as digital rights management to protect Apple’s position
(ii) Encouraging developers to bring out new applications for products such as the iTouch
(iii) Exploitation of large economies of scale which brings down the unit costs of production
(iv) Occasional price wars as the main suppliers compete for market share
(v) Strong focus on the brand and on new generations of digital media players with new features / extra functionality / stronger design and improved portability
So to sum it all up, iPods are competing in an oligopolistic market structure. Isn’t that interesting?

10A02, Nur Amirah

Pearl Milk Teais a sweetly flavoredteabeverage invented inTaiwan. Drink recipes may vary, but most bubble teas contain a tea base mixed with fruit (or fruit syrup) and/or milk. Ice blended versions of the drink are also available, usually in fruit flavors. Bubble teas may contain smalltapiocaballs or pearls called “boba”. Pearls made of jelly are also available in many places. These teas are shaken to mix the ingredients, creating foam on the top of some varieties, hence the name.

In Singapore, Bubble Tea shops are everywhere. There are located in areas such as housing estates, interchange and shopping malls. Also, the popularity of bubble in Singapore in very high and which has resulted in the opening of many Bubble Tea shops. One of the popular bubble tea brands is Sweet Talk. Have you guys ever wondered what type of market structure bubble tea shops are operating in? Now we will find out more about the Bubble Tea industry in Singapore in this blog post.

Bubble tea shops operate in monopolistic competition. Now let’s look at the characteristics of monopolistic competition.

Firstly let’s look at their number and size of bubble tea shops.  There are presence of many small and numerous bubble tea shops in Singapore. As a result, none of them are large enough to dominate the industry. The presence of many bubble tea shops is due their ease of entry (Low Barriers). We will discuss about this characteristic later in the blog post.

Next let’s look at product differentiation. The bubble tea product is slightly different from the bubble tea shops. The bubble teas of the shops are close substitute to each other. The differences in the bubble tea can be due to their quality of the pearls, the shop may offer.  The flavour can vary from oreo ice blended; honeydew ice blended and honey milk tea. Also the product differentiation can occur due to the branding. For example, some of the famous bubble tea shops are Sweet talk, Cup Walker, Koi and many more. This product differentiation is also what attracts the customers. Due to product differentiation, bubble tea shops is aid to have some monopoly power and hence faces a slightly downward sloping demand curve. It has resulted in the demand of bubble tea to price elastic due to the presence of many substitutes of bubble tea.

Thirdly, we shall look at the barriers of entry of bubble tea industry. The barrier of entry to this industry is low. There is freedom to exit and entry. This is the competitive aspect of monopolistic competition. The low barriers to entry are low start up cost as people do not spend a lot of capital. Also it is because there is no need for specialised knowledge in the bubble tea industry making it easy for people to start bubble tea shops. Also there are low capital needed for rent and labour wage. This has result the bubble tea shops to earn normal profits in the long run just as the case of the competitive firm.

Now we shall discuss about the degree of knowledge of buyers and sellers. There is presence of imperfect knowledge in this bubble tea industry.

Last but not least we shall talk about how the bubble tea shops compete. The answer is through non-price competition. Due to the large number of very close rival bubble tea shops makes direct price competition to be threatening. Thus the bubble tea shops engage in non price competition. Each bubble shop does this very advertising their plus points about their bubble tea such as the quality of the pearls. Also they engage in non price competition by promotions. Example of promotions ofd bubble tea shops are that there provide free pearls and offer set meals with bubble tea at a lower price. The bubble tea shops also offer promotions such as redeeming free bubble tea with every six bubble tea brought. This promotions help to attract customers to the bubble tea shops.

Now that we discuss about bubble tea industry in Singapore, it will be easier to understand about the bubble tea industry.

Shakeela Parvin

09S11

8^th August

To spend or not to spend? That is the question many governments are asking. Massive stimulus packages (a form of expansionary fiscal policy) helped prevent a global depression, but also gave governments severe budget deficits. With the worst of the depression seemingly over, should governments pursue austerity measures (a form of contractionary fiscal policy) to deal with their debt? In my opinion, they should not – instead, they should further increase spending!

During a recession, both consumption and investment expenditure (collectively known as private spending) fall, so an increase in government expenditure (through a stimulus package) is needed to raise aggregate demand and national income. Stimulus spending also boost private spending, thanks to the multiplier effect. For example, if China decides to build a new airport, demand for construction workers would increase, leading to lower unemployment and higher wages for construction workers (including newly hired ones, who previously had no salary). As the disposable incomes of construction workers rise, they would spend more on food, clothes and other necessities (higher consumption expenditure). But that is not all! Firms selling food, clothes and other necessities would earn more revenue, prompting them to increase their investment expenditure. Of course, the extent of the multiplier effect depends on the percentage of extra income that is spent (rather than saved or taxed), also known as the marginal propensity to consume.

Although stimulus spending has helped the global economy recover, this recovery remains fragile. Private spending and financial markets are still shaky. John Keynes, the father of modern macroeconomics, wrote that “the boom, not the slump, is the right time for austerity”. If governments prematurely pursue austerity measures, many countries may plunge back into recession. In fact, Nobel Prize-winning economist Paul Krugman argues that current stimulus packages are insufficient to address existing economic problems. He notes that in 2009, the American government estimated that production levels fell US$2 trillion short of productive capacity, but only approved a US$700 billion stimulus package.

Why? Obama had to modify his initial proposal to pacify staunch Republicans, who decried the stimulus package as a move towards a  socialist economy, conveniently forgetting that government intervention in markets is periodically needed to correct market failure. For governments to solve such a severe crisis, sound pragmatism needs to triumph over blind idealism. The completely free market will not correct itself, as the current crisis is too severe to be considered part of the business cycle. A stimulus package is meant to be a temporary, emergency measure, which aims to help the private sector get back on its feet.

Nevertheless, some governments are concerned that further stimulus spending could lead to severe inflation. They forgot that in a recession, aggregate demand is low and the economy would be operating at the Keynesian range, so the risk of demand-pull inflation is low. Governments should be more worried about the possibility of deflation, which would further discourage private spending and prolong the crisis. Deflation in Japan has left the country stuck in the liquidity trap, under which deflation raises real interest rates, so even nominal interest rates of zero fail to stimulate private investment. Banks cannot lend at negative nominal interest rates, as they would be paying borrowers extra money! If they did so, the banks would be bankrupt!

Governments can also go bankrupt if they cannot pay their debts. Hit hard by the current crisis, Greece recently received a bailout worth 110 billion euros from the International Monetary Fund to avoid national bankruptcy. Jean-Claude Triche, President of the European Central Bank, warned that the “fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope”. If governments finance their fiscal spending (and debt) through excessive borrowing, banks would have less money to lend to the private sector and interest rates would rise, thus crowding out private spending. Similarly, boosting government revenue by raising income and corporate tax would reduce the spending power of the private sector.

Hence many governments see austerity measures as the solution to their large and potentially unsustainable budget deficits. In a Financial Times article, Robert Skidelsky (an economics professor at the University of Warwick) argues that budget deficits are not as problematic as balance of payments deficits, as borrowing and repayments redistribute income. According to the article, governments can pay maturing debts through further borrowing or by printing more money. The latter solution should be exercised with caution; in the 1930s, the German government printed billions of marks (German currency) to finance reparations, leading to hyperinflation and a currency crisis. Most countries do not need such measures and should be fine running fiscal deficits until the global economy fully recovers. After all, their citizens are not loan sharks! Greece got into trouble because the government had been overspending for a decade.

Dealing with deficits is important, but the buzzword should be not austerity, but restructuring. Austerity often entails drastic cuts in development and welfare spending, which would lower the material  standard of living and worsen inequity. Instead, governments could identify government programmes which are ineffective or inefficient, then scrap or reform them. That would reduce fiscal spending but cause less harm to the economy and people. Restructuring may also entail policy changes, such as increased government regulation of markets to prevent speculation and excess loose credit, as well as raising the retirement age to enable more people to stay employed and contribute to the economy. Most importantly, supply-side policies are needed to ensure long-run economic growth, which would boost government revenue and help alleviate the deficit. Supply-side policies can also help address other economic issues, such as externalities. For example, British politician Alistair Darling proposed the formation of a Green Investment Bank which would invest billions of pounds on research into alternative energy.

During the Great Depression, governments raised interest rates and pursued austerity measures, which exacerbated the crisis. As the saying goes, history repeats itself because nobody listens to it. I hope governments would learn from past mistakes; if they do not, economics will continue to be the dismal science producing dismal predictions.

Joshua (09A07)

In 1975, Bill Gates and Paul Allen founded Microsoft Corporation with the vision of placing “a computer on every desk and in every home, all running Microsoft software”. 35 years later, they have more or less fulfilled this vision. Microsoft have a monopoly over the computer software industry. Windows is the most used operating system, with a market share of about 91%, while Office has a market share of over 80%. Their monopoly is not a pure monopoly, but a contestable monopoly; there are competitors  like Apple, whose Macintosh operating system has a market share of about 8%.

How did Microsoft achieve their vision? That question calls for a brief history of the company. In 1981, IBM awarded Microsoft a contract to develop a command-line operating system for the IBM Personal Computer (PC). Microsoft did not have an operating system yet. Instead of developing one, they purchased one called QDOS, which they rebranded as MS-DOS. With its low price and wide range of software (complementary goods), MS-DOS soon became popular, prompting Microsoft to launch Windows 1.0 (in 1985) as a graphical extension of MS-DOS. They helped IBM develop a graphical operating system called OS/2, but backed out as Windows became very successful, due to its ease of use which appealed to the mass market.

After Windows 95 and 98 cemented their complete dominance of the operating system market, Microsoft had considerable market power and we know that power corrupts. They gained and retained dominance of other software markets through anti-competitive practices such as aggressive acquisitions of rival companies. In a Businessweek interview, Sun Microsystems co-founder Scott McNealy issued a challenge: “Name one thing [Microsoft] invented on their own…and I’ll research it to find out who they bought it from”. Microsoft also deliberately made their software incompatible with competing software. For example, Word documents are in a proprietary format that other word processors, such as WordPerfect, cannot read. This strategy, internally known as “embrace, extend and extinguish”, significantly raises the barriers to entry for potential new competitors, who already have to contend with the complexity of software development, the product recognition of Microsoft software and the diverse proliferation of Microsoft software.

Most importantly, Microsoft coerced PC manufacturers, such as Dell, into deals that further protected their monopoly. Under these deals, PC manufacturers were to refrain from selling PCs without Windows preinstalled (some used to sell PCs without an operating system or with Linux preinstalled), thus controlling the market outlets of competitors (except Apple, who made their own hardware for the Macintosh operating system). In addition, PC manufacturers were to bundle other Microsoft products with Windows, a practice known as tie-in sales. Manufacturers who did not comply were charged higher prices for their Windows licenses, thus pricing their PCs out of the market.

Are you reading this with Internet Explorer on Windows? Do you use Office and other Microsoft software often? If so, you should be concerned about the effects of the Microsoft monopoly on the industry and consumers like you. The Microsoft monopoly limits the software choices available to consumers and businesses. Therefore Microsoft have little incentive to ensure the quality and security of their software. Most Windows users tolerate the many crashes and viruses, unaware that other operating systems exist or deterred by the difficulty of switching. For businesses, insecure Microsoft software could reduce efficiency and productivity. Since Microsoft software is so widely used, malware makers only need to develop for one operating system, which makes the spread of malware easier. Furthermore, Microsoft has insufficient incentive to innovate  and their lack of innovation harms the entire software industry. Rival firms may produce innovative software, but may also be quickly driven out of the industry, no thanks to the anti-competitive tactics Microsoft employs.

The competition may be small, but they are fighting back. Over the years, the free software movement has produced many free software programs, such as the Linux operating system, the OpenOffice.org office productivity suite and the Firefox web browser. Free software is built by communities of software enthusiasts and thus appeals to consumers who are sick of paying money to and being exploited by software companies, whose primary goal is profit maximisation. Some rival firms specialise in a narrow range of products and, ironically, have gained monopolies that Microsoft cannot break! An example would be the portable media player market, where the Apple iPod holds a market share of over 70% while the Microsoft Zune holds a miserable 10%. Moreover, consumers and businesses are shifting towards web-based software and services, a sunrise industry  where Microsoft’s anti-competitive practices are less successful and their Windows Live services are losing out to the online offerings of Yahoo! and Google.

Looks like the Microsoft monopoly is weakening. Lawsuits against Microsoft by the United States government and European Commission found the company guilty of violating anti-trust laws. As a result, Microsoft were required to stop bundling some products (such as Windows Media Player) with Windows and to release information that facilitated interoperability with competing products. To compound matters for Microsoft, consumer tastes and preferences  were changing. Consumers and businesses are now more aware of, and more willing to adopt, alternative software (some even boycott Microsoft due to their business practices). For instance, the market share of Internet Explorer has fallen from 95% in 2002 to 60% today, as web surfers prefer other web browsers such as Firefox, Opera and Safari. In fact, Bill Gates has lost his position as the richest man in the world and has decided to devote more time to his philanthropy.

Microsoft can no longer afford to be complacent. To stay competitive, Microsoft have given some of their products an overhaul. The latest version of Office boasts an easy-to-use ribbon interface, while the latest version of Internet Explorer is more secure and has many new features. Similarly, their competitors will continue to come up with better and more innovative software. As the competition intensifies, the winners would be the software industry and software users like you and me (as well as millions of African children who will be aided by the Bill & Melinda Gates Foundation).

Joshua (09A07)

On April 20 2010, there was an explosion on one of BP’s drilling rigs approximately 50 km offshore and over 1000m underwater in the Gulf of Mexico. This has led to more than 5000 barrels of oil leaking into the sea daily. Several failures to curb the leaks have led to the slick expanding and covering an area bigger the size of Luxembourg. Despite having a solution found now, it has definitely led to many problems.

Externalities- the third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid to the third parties. 

Externalities will lead to market failure when the price mechanism does not take into account the full social costs and benefits of production and consumption.

Negative Externalities of the Oil Spill

• Millions of dollars lost due to production of shrimps, fish and other fish products by the fishers, increasing prices of seafood.(Food costs are already rising for restaurateurs. Wholesale food prices rose 7%  in the 12-month period that ended March 31, with certain commodities spiking much more, such as unprocessed fin fish (a 48 percent price jump).
• Unemployment and the lost of  incomes derived from the billion dollar tourism industry of Louisiana and Florida(e.g. fishermen)
• Cost of wildlife and wildlife breeding grounds lost
• Killing of sea life and other wild life
• Destroying habitats
• Lost jobs due to the suspension of deep water drilling operations
• Health costs of cleanup workers in the front line
• Cost of air pollution ( people living at or near coastal areas may suffer from health issues such as respiratory related ailments in the future)

Positive Externalities of the Oil Spill

• Millions of feet of boomers employed to prevent oil from spreading (increase boomer production leads to increased income for  manufacturers of this material)
• Producers of dispersants benefited as millions of dollars were spent on dispersants
• Thousands of  kiddies scoopers were sold at $2 each benefiting the manufacturers
• The increase in demand for respirators would mean an increase in income to producers of this device.
• 30,000 cleanup workers were hired(increase employment)
• 200 portable toilets were rented at $200,000 per month( increasing income of providers more than 3 times)
• Hotels in the gulf area are fully booked for six months which means increased income
• $360 million for a project to build six sand berms meant to protect Louisiana’s wetlands from spreading oil
• Income derived from production of technologies to cap like robots and capping domes, etc.

For many, the oil spill will have a noticeable impact in both the short and long terms, said Matt Rafferty, economics professor at Quinnipiac University’s School of Business in Hamden.

“It’s pretty basic supply and demand. There’s an immediate reduction in the supply,” he said, meaning prices will rise.

The Gulf Coast is the cheapest seafood supplier available to businesses, he said, so taking it out of commission, even temporarily, will affect prices. “It’s our cheapest, best option. If you eliminate that, you go on to your next best option. The question is, what will that next best option cost?”

The oil spill has economic implications beyond price increases, he said, with many fishermen’s livelihoods taking a toll — not to mention the extreme environmental concerns.

Tan Siong Min

09s17

What is environmental economics?

Environmental economics is a subfield of economics that looks at environmental issues in relation to economic development and sustainability. Environmental economics looks largely at environmental policies in countries, and how they impact the local and global economies, either positively or negatively.

Why do we need environmental economics?

It makes sense to use economics in environmental policies due to the fast depletion of natural resources, making the environment a scarce resource. Since economics is about how to deal with scarce resources, it can often be useful when tackling environmental problems.

One of the basis of environmental economics is to look at various causes of market failure. A market failure is said to have occurred when distortions prevent the price mechanism from allocating resources efficiently, resulting in welfare loss. Ideally, environmental economics views a healthy market as functioning such that all resources are distributed in such a way that society welfare is maximised. A cause of market failure is that positive and negative externalities are ignored.

Looking at the standard demand and supply diagram with pollution, an unregulated market leads to equilibrium price and quantity determined at the intersection of the supply, or marginal private cost (MPC) curve and the demand curve: P1, Q1.

Consumers and producers enjoy the gains from this equilibrium. The consumer surplus is shown by area abcd. The producer surplus is shown by area fgh.

Unfortunately, production of Q1 generates negative externalities such as fewer healthy days, fewer recreation opportunities. The full cost to society of production of Q is the marginal social cost curve: MSC = MPC + MEC. The external costs of Q1 is equal to the vertical distance between MPC and MSC at Q1. 

Environmental economics tries to highlight these failures so that nations can implement regulation to better steer the market. Environmental regulation is designed to get firms to internalize the externality by considering the external costs of production. If firms face a constant pollution tax on each unit of output so that they face production costs equivalent to the MSC curve then the new market equilibrium will be P2, Q2. The regulated product market will have a higher price and lower quantity.

Policies to curb market failure from negative externalities

            An example of such a policy is the US air pollution trading scheme. The trading scheme requires a 50% cut in sulphur dioxide emissions from 1980 levels by 2010, using cap and trade. Clean air means fewer Americans will suffer from respiratory-related illnesses such as asthma, lung disease and heart disease, thus the externality is reduced.

According to the EPA (US Environmental Protection Agency), sulphur dioxide emissions in 2001 were 33% down on 1990 levels, a 5% drop from the previous year down to 10.6 million tonnes. Nitrogen oxide emissions in 2001 were down 25% on 1990 levels, to 4.1 million tonnes – an 8% lower than the previous year. However, one facility covered by the scheme failed to meet its targets, missing by 60 tonnes. The facility was fined over US$166,000, at nearly US$3,000 per tonne.

Lu Yin 09S17

Many youths are guilty of taking cabs, especially when we are late for school. We would usually rush to get a cab.

The Taxi company in Singapore is an oligopoly, leading this industry is comfort DelGro, with 6 other firms in the industry. Comfort DelGro holds 62% of the market share in cabs, also its long history in Singapore makes it an appropriate cab price leader.

In 2007, Cab companies were urged to increase their flag off rate, This is so due to the increase in prices for diesel. This means an increase in the cost of operation which cabbies may not be able to cover over the profits they make. This can be detrimental to the cab drivers who do not have a stable income unlike the white collar workers. In order to avoid such an ordeal, some cabbies choose to share the rental with a co-worker, such as working shifts. Even though this may sound like a good alternative to the hike of operational cost. Each cab driver does not earn much and the increase in operational cost, increases their daily operation expenses by 2 dollars a day, counting that their average pay is about a $1000 or lesser a month, this affects cabbies a lot.

Also the increase in Electronic Road Pricing ( ERP) has worsen their low income. Due the increase in the cost of ERP and the multiple placing of the ERP, many cabbies may have to pass certain ERPs to get to their passengers and therefore this erodes them of their income. As quotes from the channel news asia article “Mr Steven Neo said he would “think twice” about entering downtown areas to pick up passengers as he has to foot the ERP charge himself if he does not have a passenger.” , this prove that it is due to the increase in operational cost that firm have to increase their flag off rate.

The increase in price is unusual, logically, if a firm increases its price, rival firms would keep price constant, so that they would get an increase in demand for cabs, leading to an increase in profits. However this time, due to the increase in operational cost, the other firms are taking on a collusive behaviour by following a price leader. This means that all other firm s follow the price leader in terms of price.

This has prove to been good for firms and cabbie. Yet consumers had an issue of adapting to the new price. After some time, most consumers would have been used to the new prices and take cabs once more.

This shows that the price you pay for rushing to school increases, literally.

Rachel 09S11

A doughnut or donut is a type of fried dough food popular in many countries and prepared in various forms as a sweet (or occasionally savoury) snack that can be homemade or purchased in bakeries, supermarkets, food stalls, and franchised specialty outlets. They are usually sweet, deep-fried from flour dough, and shaped in rings or flattened spheres that sometimes contain fillings.

*

DONUT CRAZE IN SINGAPORE

There seems to be a Donut Craze going around in Singapore in the recent years, where consumers are willing to queue up to hours to purchase a box of delicious and lovely donuts. What is the reason for this? We can find out as we investigate and dissect the market structure a donut industry operates in.

Number and size of firms:
The donut industry is operating in a monopolistic competitive market structure. There are large number of donut shops in Singapore, and none of them are able to dominate the industry. Although some may argue that certain firms such as the mentioned Donut Empire and Donut Factory are dominating the market, we must also consider that other small bakeries (such as the ones in your neighborhood, Qbread, DJ Bakery, etc) can sell the same amount of donuts and the ‘Donut Craze’ is simply mere sensationalism by the media.

Nature of product:
There is evident product differentiation in the industry as well. The products of each firms are close (but not perfect) substitutes of each other. The differences may be the types of flavour and designs of the donuts, qualities of donuts as well as branding, which is an important factor for the donut sensation in Singapore. For example, you can see that even though there are cheaper alternatives for donuts in bakeries like DJ Bakery, you still see long queues of consumers purchasing donuts from Donut Empire and J&CO. This is so because of the unique qualities of donuts, such as the delicious and unusual flavours (Green Tea, Peanut Butter.. etc) that the firms provide. The consumers see this as different from that of common bakeries. Although the difference may be small, but consumers do not think so. The firms, through differentiation in products, are able to carve out a share of the market for themselves. Hence, the price elasticity of demand of donuts is fairly elastic.

Conditions of entry and exit:
There is also freedom of entry and exit as there requires low start-up cost. Such costs of set-up may be simply the rent of a storefront, machinery to bake the donuts and employment of workers. No substantial amount of production costs (smaller scale) is required. However, it means that the firms will only earn normal profits in the long run just as in the case of a perfectly competitive firm.

Degree of knowledge of buyers and sellers:
Imperfect knowledge. Each firm will not have perfect knowledge of the secret recipes or production methods of ALL the other donut sellers in Singapore. At the same times, consumers are unlikely to have perfect knowledge on prices offered by all the donut sellers, including the smaller bakeries in Singapore.

How firms compete:
Non-price competition.

Advertising is a strong way to compete against the firms in the same industry. Firms spend a large amount of capital on advertising in order to brand their product and also create brand loyalty. It enlarges the basic differences in their products to convince the public that their product is better. The picture above shows the advertisement Donut Empire released. 

Not only that, promotions and sales appeal to customers as well, to buy more at lower prices or with free donuts or gifts. These makes the firms’ sales less susceptible to competitor’s marketing strategies. 

Now that we’ve implored the realm of Donuts and their power in Singapore…

Are you hungry for these tasty-looking donuts?
Because I am!

Poh Wan Zhen
09S11
15 July 2010

(click on pictures to enlarge them)

Have you ever noticed or even wonder what market structure the stores in our food court and hawker centres, operate in?

Just yesterday, I was at downtown east and I ordered a plate of chicken rice. However, there’s two stores selling chicken rice in the food court at downtown. I was thinking to myself “How do they make money if both sell chicken rice and what’s more they’re just one store away from each other?”

Next, I realised that, one store had only white skin chicken rice (store B) while the other had only roasted duck and “brown” skin chicken rice (store A). The next thing I noticed is that the store selling the brown skin chicken rice had a longer queue compared to another store even though the plate of brown chicken rice was priced at a higher price.

Thus, the two chicken rice stores operate in a monopolistic competition market (presuming majority of customers who buy from Store A only purchase brown chicken rice instead of roasted duck)

Firstly, let’s look at the structure/feature/characteristics of the two “firms” are operating in.

No and size of firms: many, none large enough to dominate the industry. The two chicken rice stores are most definitely unable to dominate the other chicken rice stores in Singapore!

Barriers to entry: Weak. Free entry and exit from industry. Anyone with the capital is able to start a chicken rice store. We do not need to be equipped with much skill to start a chicken rice store (obviously we need to know how to make nice chicken riceJ to be able to maintain the business)

Nature of product: differentiated (white skin versus roasted chicken rice)

Product differentiation: Each firm’s product is slightly different from the others in the industry. Because of product differentiation, each firm is able to carve out a share of the market (in this case, the food centre in downtown east) for themselves. If each were to increase its price, each will not face a total loss of demand as they do have some monopoly power. Their demand curve is thus slightly downward sloping as compared to a firm operating in a perfect competition market.

Thus the dd curve is relatively price elastic- each firm has some ability to set price. It would lose some of its customers, who will turn to cheaper alternatives. The firm will not lose all its sales due to product differentiation.

As observed in the pictures, store A has been featured in newpapers and food magazines. You can see some pasted at the store(couldn’t take clearer pictures, the person at the cashier was eyeing me!) In contrast, Store B did not have newspaper cuttings pasted.

Relating that back to the chicken rice stores, store A(brown skin) is considered a more “well known” brand as its chicken rice is more delicious but the price is more expensive. However, some may go for the cheaper alternative (white skin). However, they will be some loyal customers that will only choose to eat from store A, even though it it’s more expensive.

Now, why don’t we all be more observant and take a look around malls or food centres and try to figure out what market structure they are operating in. This increases our interest in Economics and gives us more real life examples in our essays, bringing Economics to a whole new level  

Vivienne Wee 09S01 

posted on 14 july