When a country’s economy is ranked the 2nd freest in the world, how do they manage auto congestion and pollution?
By auctioning a limited number of vehicle permits, Singapore makes owning a car very expensive. A VW Passat in Singapore could cost as much as the median price of a house in a US metropolitan area ($158,100).
The reason is demand and supply. On the demand side, there are lots of millionaires (17% of all households), unemployment is low, job security is high and businesses will make interest free car loans to employees. On the supply side, permits are limited. As a result, according to auction information on Bloomberg, the vehicle permit alone could cost you S$89,990 ($73,332.52).
In other words, Singapore creates a market in vehicle permits to control traffic congestion and auto pollution.
Sources and Resources: My thanks to marginalrevolution.com for the Singapore story and Bloomberg for the details. Also, here, Bloomberg reports the most recent price of the permit and here is the (astronomical) price of a VW Passat. Finally, to see why Singapore is categorized as a free economy when its political system is much more restrictive, you can look at the Singapore link in the Index of Economic Freedom.
Posted by: adminEcon
Tags: auto pollution, Certificate of Entitlement, COE, cost, demand, Index of economic Freedom, negative externalities, Pigou, singapore, supply, traffic congestion, vehicle permits, VW Passat
To estimate the size of the corn crop, the U.S. Department of Agriculture (USDA) hires corn counters. Calculating stalk stats and assessing cob size, they observe 15 foot sections in thousands of fields. Add to that weather predictions, yield trends, and other pertinent data and you get an estimate for how much corn will be harvested. Once you also know about stockpiles (corn in silos and other storage facilities), a picture of the supply side of the market emerges.
What happens then? In corn (futures) markets, prices respond.
According to the WSJ, inaccurate USDA forecasting has led to more corn price volatility. June 30, 2010 for example, when the USDA said stockpiles were smaller than expected, prices spiked and a rancher had to paid an extra $200,000 for his feed. When prices fell, China was observed “swooping in.”
Do you want to better understand futures markets? This is a clear explanation of how the orange crop affected prices in (Eddie Murphy’s) Trading Places wonderful climax. A more academic discussion is here.
Our bottom line? Discussed in an econlife post, according to Michael Pollan, more than one-quarter of all supermarket items are affected by the price of corn.
The Economic Lesson
The three basic economic systems are tradition, command and the market. Reflected by corn futures, in reality, most economies are mixtures.
An Economic Question: Name several economies you believe have much more of a market than government influence. Then check the Index of Economic Freedom to see if you are correct.
Having just looked at the “Human Development Report 2010” from the UN, I thought of a former mayor of NYC, Ed Koch. Mayor Koch used to ask, “How am I doing?” Let’s assume that an economy can ask the same question. What yardstick would you use for an answer?
The GDP is a possibility. It tells us the value of goods and services that we produce. If we make more cars and grow more wheat and examine more teeth, then our economy has grown. Can we say that we are doing well if the U.S. is #1 in the world?
The “Human Development Report” (HDR) has per capita income as one variable but also looks at education, and life expectancy. Using the HDR yardstick, Norway is #1. Separately, the authors of the report look at other variables including sustainability, gender inequality, security, and “decent work.”
Yet another possibility takes us to the “Index of Economic Freedom.” Using variables that assess the extent that government influences an economy such as trade freedom and property rights, the “Index of Economic Freedom” places Hong Kong at the top.
The Economic Lesson
Yardsticks influence economic policy. Just because we measure something, we tend to want to influence it. So, if we focus on GDP (and whatever components that includes), then we will try to improve it. If employment numbers stand out, then they become most important. Correspondingly, if decide that HDR is our key yardstick, most likely, we will keep a spotlight on its variables.
Sometimes, the Federal Reserve has a dilemma because it has to decide which yardstick it values most: the inflation yardstick or the one that looks at unemployment.
Which yardstick do you believe we should use to answer, “How are we doing?”
Just like teachers, the writers of the Index of Economic Freedom give grades. Instead of students, though, countries receive their grades after being “tested” on such economic issues as starting a business, tax policy, and private property. The highest grades are earned by the countries that give citizens the most freedom to produce and distribute goods and services without government interference.
For the 2010 Index of Economic Freedom, Hong Kong, with a grade of 89.7 was first. Ranked last at #179, North Korea’s score was “1″. The United States was #8 with an average of 78.
A recent NY Times article illustrated why North Korea fared so poorly. Demonstrating a citizen’s lack of monetary freedom, the North Korean government devalued its currency last November. Suddenly, a family’s life savings of $1560 became $30 (4,050 North Korean Won). In the business sector, with all factories run by the state, production is stagnant and workers, sometimes, are not paid. In agriculture, (as with the former Soviet Union) individual plots of land are far more productive than large state-owned collectives. The results? The North Korean economic system has produced massive poverty and inadequate food.
The Economic Lesson
Countries produce and distribute goods and services through three basic economic systems: tradition, command, the market system. North Korea’s centrally commanded economic system is government controlled. While the United States primarily has a market system in which people are free to function economically, still there is some command whenever government policies affect market activity.
Composed of 179 countries, the Index of Economic Freedom ranks France 64 and the United States 8. At the top of the list, with the more free economies and the lowest numbers, are Hong Kong, Singapore, and Australia while North Korea, Zimbabwe, and Cuba are listed at the other end. On the United States pages, the authors indicate that the index number is destined to increase because of the response to the financial crisis. Citing massive government spending, they say that economic freedom has diminished.
A Washington Post column by Michael Gerson actually started me thinking about government economic intervention. He pointed out that support for health care reform has recently diminished to 14% of the U.S. population expressing ‘”very favorable” views’. Taking us to an historical perspective, he says that the social safety net initially targeted the elderly through Social Security and Medicare, and the poor and disabled with Medicaid and Aid to Families With Dependent Children. Looking at waning enthusiasm for health care reform, he suggests that the U.S. population prefers a safety net reserved for those who need it rather than everyone. He is also saying that U.S. public opinion prefers a lower Index of Economic Freedom number.
The Economic Lesson
To determine the extent of government economic intervention, researchers look at such variables as the ease of starting a business, the degree to which trade is free, and the level of government spending and taxation. The list also includes the amount of corruption that permeates the business world, such labor regulations as how easy it is to dismiss an employee, and the dependability of property rights.