chapter 10-market-failure

Written by: Edmund Quek

© 2011 Economics Cafe All rights reserved.

CHAPTER 10

MARKET FAILURE

LECTURE OUTLINE

1 INTRODUCTION

2 EXTERNALITIES

3 IMPERFECT INFORMATION

4 MARKET IMPERFECTIONS

5 PUBLIC GOODS

6 IMMOBILITY OF FACTOR INPUTS

7 INCOME INEQUITY

8 MEASURES TO CORRECT MARKET FAILURES

8.1 Merit goods

8.2 Demerit goods

8.3 Pubic goods

8.4 Market imperfections

8.5 Limitations

9 MEASURES TO CORRECT THE MAREKT FAILURE OF HEALTHCARE IN

SINGAPORE

10 MEASURES TO CORRECT THE MAREKT FAILURE OF TOBACCO IN

SINGAPORE

11 MEASURES TO ADDRESS THE MAREKT FAILURE OF INCOME

INEQUITY IN SINGAPORE

References

John Sloman, Economics

William A. McEachern, Economics

Richard G. Lipsey and K. Alec Chrystal, Positive Economics

G. F. Stanlake and Susan Grant, Introductory Economics

Michael Parkin, Economics

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics



1 INTRODUCTION

A market failure occurs when the free market fails to achieve social efficiency or income

equity. Social efficiency is achieved when marginal social cost (MSC) is equal to marginal

social benefit (MSB) where MSC is the sum of marginal private cost (MPC) and marginal

external cost (MEC) and MSB is the sum of marginal private benefit (MPB) and marginal

external benefit (MEB). External costs and benefits, or simply externalities, are costs and

benefits of consumption or production experienced by society other than the producers or

the consumers. This chapter gives an exposition of market failure.

2 EXTERNALITIES

External benefits, or positive externalities, lead to a divergence between MSB and MPB

resulting in under-consumption or under-production and this is a matter of concern

particularly if the goods are merit goods. Merit goods are goods that society deems

desirable and the government thinks people should be encouraged to consume. Examples

of merit goods include education and healthcare.

In the above diagram, due to external benefits, the MSB is higher than the MPB. For

example, the consumption of education produces external benefits such as a more

innovative labour force. Therefore, the equilibrium output level (QE) where MPB is equal

to MPC is lower than the socially efficient output level (QS) where MSB is equal to MSC.

The deadweight loss, which is the loss of surplus due to market failure or government

intervention, is represented by the shaded area.

External costs, or negative externalities, lead to a divergence between MSC and MPC

resulting in over-consumption or over-production and this is a matter of concern

particularly if the goods are demerit goods. Demerit goods are goods that society deems

undesirable and the government thinks people should be discouraged to consume.

Examples of demerit goods include tobacco and alcohol.



In the above diagram, due to external costs, the MSC is higher than the MPC. For example,

the consumption of tobacco produces external costs such as increased air pollution.

Therefore, QE is higher than QS. The deadweight loss is represented by the shaded area.

3 IMPERFECT INFORMATION

Imperfect information about beneficial effects causes perceived MPB to be lower than true

MPB resulting in under-consumption and this is a matter of concern particularly if the

goods are merit goods. Merit goods are goods that society deems desirable and the

government thinks people should be encouraged to consume. Examples of merit goods

include education and healthcare.



In the above diagram, the perceived MPB (MPBP) is lower than the true MPB (MPB). For

example, the perceived MPB of education is lower than the true MPB as many people do

not fully realise the beneficial effects. Therefore, the equilibrium output level (QE) where

MPB is equal to MPC is lower than the socially efficient output level (QS) where MSB is

equal to MSC. The deadweight loss, which is the loss of surplus due to market failure or

government intervention, is represented by the shaded area.

Imperfect information about detrimental effects causes perceived MPB to be higher than

true MPB resulting in over-consumption and this is a matter of concern particularly if the

goods are demerit goods. Demerit goods are goods that society deems undesirable and the

government thinks people should be discouraged to consume. Examples of demerit goods

include tobacco and alcohol.

In the above diagram, the perceived MPB (MPBP) is higher than the true MPB (MPB). For

example, the perceived MPB of tobacco is higher than the true MPB as many people do not

fully realise the detrimental effects. Therefore, QE is higher than QS. The deadweight loss is

represented by the shaded area.

4 MARKET IMPERFECTIONS

Market imperfections are deviations from the assumptions of perfect competition that lead

to under-production and this is a matter of concern particularly if the market is

monopolistic. A monopolistic market is a market where there is a single large firm selling a

unique product that has no close substitutes. Due to lack of competition in the market, a

monopoly is a price-setter in the sense that it is able to set its price by setting its output level.

The presence of barriers to entry in a monopolistic market allows a monopoly to make

supernormal profit in the long run. A monopoly has substantial market power which it can

use to restrict output and charge a higher price to make more profit resulting in

under-production.



In the above diagram, the socially efficient output level where MSB is equal to MSC is QS.

However, if the monopoly increases its output level above QM where its MPC is equal to its

MR, the increase in its total cost will be greater than the increase in its total revenue as its

MPC will be higher than its MR. If the happens, its profit will fall. Therefore, the

monopoly will restrict its output level to QM which is lower than QS. The deadweight loss,

which is the loss of surplus due to market failure or government intervention, is represented

by the shaded area.

5 PUBLIC GOODS

Public goods will not be produced in the absence of government intervention. Public goods

are goods that are non-rivalrous and non-excludable such as national defence and street

lighting. A good is non-rivalrous when the consumption of the good by a consumer will not

reduce the amount available to other consumers. In other words, an extension of the good

to one more consumer will not reduce the amount available to current consumers. A good

is non-excludable when the person who pays for the good cannot prevent those who do not

from consuming it. Since people can consume public goods without paying for them, they

are unwilling to pay for them. Therefore, non-excludability leads to the free-rider problem

resulting in the non-provision of public goods.



In the above diagram, the demand curve shows the maximum price that consumers are able

and willing to pay at each quantity. If the good is excludable, it will be the MPB. However,

since a public good is non-excludable, it is zero which means that the demand curve is a

horizontal line which coincides with the quantity axis. In this case, the demand curve (D)

and the supply curve (S) do not intersect which leads to the non-provision of the public

good. The deadweight loss, which is the loss of surplus due to market failure or

government intervention, is represented by the shaded area.

6 IMMOBILITY OF FACTOR INPUTS

Immobility of factor inputs may prevent a market from achieving equilibrium resulting in

social inefficiency. When changes in demand occur, firms will respond by changing their

output and hence the amount of factor inputs they employ. However, owners of factor

inputs may be slow to respond due to immobility. For instance, workers may be immobile

occupationally or geographically. Occupational immobility occurs when workers do not

have the relevant skills and knowledge to move to the industry immediately. Therefore,

they need time to undergo education and training before they can move to the industry.

Geographical immobility occurs when workers do not reside in the place where the

industry is located. Therefore, they need time to relocate before they can move to the

industry. As workers move to the industry over time and hence the market moves towards

the equilibrium, the equilibrium moves and this causes the market to be in a constant state

of disequilibrium resulting in social inefficiency.



In the above diagram, the demand (D0) and the supply (S0) lead to the equilibrium (e0).

When the demand changes from D0 to D1, the equilibrium changes from e0 to e1. However,

as the market moves slowly to the new equilibrium (e1) due to immobility of factor inputs,

the demand changes again from D1 to D2 which leads to another new equilibrium (e2).

7 INCOME INEQUITY

Income inequity may result in some goods and services not being allocated to the people

who need them more. Effective demands are demands that are backed by the ability to pay.

Ineffective demands are demands that are merely driven by the willingness to buy. The free

market only responds to effective demands which means that it only distributes goods and

services to the people who have the willingness and the ability to pay for them. However,

the ability to pay does not reflect needs and hence individuals who need some goods and

services but do not have the ability to pay for them have to go without the goods and

services. This is likely to happen if the distribution of income in the economy is inequitable,

with the high ability to pay of high income individuals pushing up the prices of goods and

services, keeping low income individuals out of reach of some goods and services.

Therefore, income inequity may lead to an undesirable allocation of goods and services to

individuals in the sense that some goods and services may not be allocated to the people

who need them more. This is a matter of concern particularly if the goods and services are

necessities such as food, water, housing, education and healthcare. In the absence of

government intervention, the free market may lead to gross income inequity.



8 MEASURES TO CORRECT MARKET FAILURES

8.1 Merits goods

To correct the market failure of merit goods, the government can give a subsidy to firms to

induce them to increase output.

In the above diagram, a per-unit subsidy leads to a fall in the MPC curve. If the new MPC

curve is MPC’, the new equilibrium output level (QE’) will be equal to QS.

Apart from the use of indirect subsidy, the government can take other measures to correct

the market failure of merit goods. Take education for example. The government can give a

subsidy to consumers of education. It can pass a regulation to make a certain number of

years of education compulsory for every child. The government can provide education

directly alongside private educational institutes. It can educate the public through

campaigns to increase the awareness of the beneficial effects of education.

8.2 Demerits goods

To correct the market failure of demerit goods, the government can impose a tax on firms

to induce them to decrease output.



In the above diagram, a per-unit tax leads to a rise in the MPC curve. If the new MPC curve

is MPC’, the new equilibrium output level (QE’) will be equal to QS.

Apart from the use of indirect tax, the government can take other measures to correct the

market failure of demerit goods. Take tobacco for example. The government can pass a

regulation such as prohibiting smoking in public places such as shopping malls, food

centres and entertainment outlets. It can prohibit people under a certain age from smoking.

The government can educate the public through campaigns to increase the awareness of the

harmful effects of smoking.

8.3 Public goods

The market failure of public goods can only be corrected by direct provision. For instance,

national defence and street lighting are provided by the Singapore government directly

through tax.

8.4 Market imperfections

The market failure of market imperfections may be corrected by giving a subsidy to the

monopoly to induce it to increase output.



In the above diagram, a per-unit subsidy leads to a fall in MPC. If the new MPC is MPC’,

the new profit-maximising output level (QM’) will be equal to QS.

Apart from the use of indirect subsidy, the government can take other measures to correct

the market failure of market imperfections. The government can pass a regulation that

requires the monopoly to charge a price equal to its marginal cost or average cost and these

are commonly known as marginal cost pricing and average cost pricing. It can also

nationalise the market to produce the good itself.

7.5 LIMITATIONS

The measures to correct market failures are subject to several limitations. Since external

costs and benefits cannot be known precisely, the government may have difficulty in

determining the amount of tax or subsidy needed to correct a market failure. The passing of

regulations requires the setting up of regulatory bodies to ensure that people comply with

the regulations and these enforcement costs can be rather high. Education is not legally

binding which means that it is not mandatory for people to respond to it and its effects will

only be realised in the long run. State-owned firms do not need to consider factors such as

profitability and survival and hence are more likely to be x-inefficient and hence

productively inefficient than private firms. In an attempt to make more supernormal profit,

the monopoly may provide false information about its revenue and cost structures to the

government and hence the use of MC pricing and subsidy may not correct the market

failure of market imperfections.



8 MEASURES TO CORRECT THE MAREKT FAILURE OF HEALTHCARE IN

SINGAPORE

Healthcare is a market failure because it will be under-consumed in the absence of

government intervention due to three reasons: positive externalities, imperfect information

and market imperfections.

Subsidy

The Singapore government gives a subsidy to public hospitals for the provision of

subsidised healthcare to increase the supply. The amount of subsidy that consumers of

healthcare at public hospitals will receive depends on their income and the type of ward

accommodation they choose. For non-working consumers, the amount of subsidy that they

will receive depends on the value of their residential property and the income of their

immediate family members. A subsidy on healthcare will lead to a fall in the cost of

production and hence a rise in the supply. When this happens, the price of healthcare will

fall which will lead to a rise in the quantity demanded and this may correct the problem of

under-consumption.

In the above diagram, a subsidy on healthcare leads to a fall in the MPC curve. If the new

MPC curve is MPC’, the new equilibrium output level (QE’) will be equal to QS.

Benefits and limitations

Giving subsidy to correct the market failure of healthcare in Singapore has its benefits and

limitations. First, a subsidy on healthcare expressed as a percentage of income is higher for

low income individuals than for high income individuals. Therefore, a subsidy on

healthcare in Singapore leads to an improvement in income equity. Second, the use of

means-testing in public hospitals in Singapore means that low income individuals receive

more subsidy than high income individuals which further improves income equity.

Notwithstanding the benefits, there are several limitations. First, the external benefits of

healthcare cannot be known precisely. Therefore, if the subsidy per unit of output given by



the Singapore government is not equal to the marginal external benefits, it will not help to

achieve the socially efficient output level. Second, subsidising healthcare puts a strain on

the government budget which may compel the Singapore government to decrease

expenditure in other important areas such as education and infrastructure which may result

in adverse consequences for the economy in the long run.

3M framework

The Singapore government has created the 3M framework to increase the demand for

healthcare. The Singapore government has set up Medifund to help the very poor pay for

their healthcare at public hospitals. Medifund is an endowment fund set up by the

Singapore government with capital injections coming from budget surpluses. The interest

income from Medifund is used to help the very poor who cannot afford the subsidised

charges at public hospitals pay for their healthcare. The Singapore government has

introduced a compulsory medical savings scheme known as Medisave. Under the scheme,

working citizens in Singapore are required to make monthly contributions to their

Medisave account which can be used to pay for their healthcare. The Singapore

government has set up an optional medical insurance scheme known as MediShield. Under

the scheme, a person is automatically covered unless he opts out and the insurance

premium can be paid through Medisave.


Creating the 3M framework to correct the market failure of healthcare in Singapore has its

benefits and limitations. First, Medifund has not only increased the demand for healthcare

in Singapore, but it also ensures that healthcare is accessible to everyone which helps

address the market failure of income inequity. Second, unlike using subsidy, Medisave and

MediShield do not require the Singapore government to incur substantial expenditure.

Notwithstanding the benefits, there are several limitations. First, Medifund only covers a

limited range of healthcare services. Second, only a small proportion of the monthly CPF

contribution goes to the Medisave account. Third, not everyone has taken up MediShield as

it is not mandatory to do so.

Direct provision

The Singapore government provides healthcare directly alongside private hospitals

through public hospitals that are run as private companies wholly-owned by the Singapore

government to increase the supply.


Engaging in direct provision to correct the market failure of healthcare in Singapore has its

benefits and limitations. Direct provision of healthcare in Singapore has not only increased

the supply, but the lower charges at public hospitals have also increased the affordability

which helps address the market failure of income inequity. However, public hospitals do

not need to consider factors such as profitability and survival and hence are more likely to

be x-inefficient and hence productively inefficient than private hospitals. Running the

public hospitals in Singapore as private hospitals will only alleviate the problem to some

extent.



Regulation

The Singapore government has made childhood immunisation against certain diseases

mandatory to increase the demand for healthcare.


Passing regulations to correct the market failure of healthcare in Singapore has its benefits

and limitations. Regulations on healthcare are easy to formulate and pass in Singapore due

to the absence of a strong opposition party in the parliament. However, the passing of

regulations requires the setting up of regulatory bodies to ensure that people comply with

the regulations and these enforcement costs can be rather high.

Education

The Singapore government has used education such as launching campaigns and

incorporating the values of good health into the school curriculum to increase the

awareness of the beneficial effects of good health to increase the demand for healthcare.


Using education to correct the market failure of healthcare in Singapore has its benefits and

limitations. First, incorporating the values of good health into the school curriculum may

help people stay healthy from a young age. Second, unlike using regulations, education on

healthcare does not incur enforcement costs. Notwithstanding the benefits, there are

several limitations. First, education is not legally binding which means that it is not

mandatory for people to respond to it. Second, even if it is effective, its effects will only be

realised in the long run and this is especially true for preventive healthcare whose benefits

are not immediately obvious.

9 MEASURES TO CORRECT THE MAREKT FAILURE OF TOBACCO IN

SINGAPORE

Tobacco is a market failure because it will be over-consumed in the absence of government

intervention due to two reasons: negative externalities and imperfect information.

Tax

The Singapore government has imposed an excise tax on cigarettes to reduce the supply.

An excise tax is a tax imposed on a specific good. It is a specific tax which is an indirect tax

of a certain amount per unit sold. The Singapore government has imposed an excise tax of

$352 on every 1000 sticks of cigarettes which is equivalent to $7.04 on each packet of

cigarettes. An excise tax on cigarettes will lead to a rise in the cost of production and hence

a fall in the supply. When this happens, the price of cigarettes will rise which will lead to a

fall in the quantity demanded and this may correct the problem of over-consumption.



In the above diagram, an excise tax on cigarettes leads to a rise in the MPC curve. If the

new MPC curve is MPC’, the new equilibrium output level (QE’) will be equal to QS.


Imposing an excise tax on cigarettes in Singapore to reduce the supply has its benefits and

limitations. First, an excise tax on cigarettes in Singapore allows the government to raise

tax revenue which can be used to fund research to prevent or treat tobacco-related diseases.

Second, an excise tax on cigarettes in Singapore enables the government to reduce other

taxes. If this happens, the costs of increased air pollution caused by smoking in Singapore

will be transferred from the public to the smokers which will increase the fairness of how

the costs are borne. Third, the price elasticity of demand for cigarettes by teenagers is likely

to be high due to their limited purchasing power. Therefore, an excise tax on cigarettes in

Singapore which will increase the price may substantially reduce the problem of teenage

smoking. Notwithstanding the benefits, there are several limitations. First, the external

costs of tobacco cannot be known precisely. Therefore, if the excise tax of $7.04 on a

packet of cigarettes imposed by the Singapore government is not equal to the marginal

external costs, it will not help to achieve the socially efficient output level. Second, an

excise tax on cigarettes in Singapore which will increase the price may lead to large

differences between the price of cigarettes in Singapore and those in its neighbouring

countries such as Malaysia. If this encourages the people in Singapore to buy contraband

cigarettes from these countries, the consumption of cigarettes may not fall. Third, an excise

tax on tobacco expressed as a percentage of income is higher for low income individuals

than for high income individuals. Therefore, an excise tax on cigarettes in Singapore

worsens income inequity.

Regulations

The Singapore government has passed several regulations to reduce the demand for

cigarettes. The Singapore government has prohibited smoking in some public places such

as shopping malls, food centres, entertainment outlets, schools, bus stops, bus interchanges,



public toilets, swimming pools, community centres, stadiums, sheltered walkways,

overhead bridges, outdoor hospital compounds, common corridors, void decks and

staircases within residential buildings. It has also prohibited people under 18 years of age

from buying cigarettes, people under 18 years of age from smoking and firms from

engaging in tobacco advertising in any form. Further, it has made it compulsory for

tobacco manufacturers to display graphic health warnings such as pictures of diseased

lungs on cigarette packets. All these regulations have reduced the demand for cigarettes in

Singapore.


Passing regulations to reduce the demand for cigarettes in Singapore has its benefits and

limitations. First, regulations on cigarettes are easy to formulate and pass in Singapore due

to the absence of a strong opposition party in the parliament. Second, unlike an excise tax

on cigarettes, regulations on cigarettes in Singapore will not induce people to buy

contraband cigarettes or worsen income inequity. Notwithstanding the benefits, there are

several limitations. First, the passing of regulations requires the setting up of regulatory

bodies to ensure that people comply with the regulations and these enforcement costs can

be rather high. Second, if prohibiting smoking in specific places leads to an increase in

smoking in non-prohibited places, the demand for cigarettes may not fall. Third, if the

Singapore government prohibits smoking in increasingly more places, Singapore may

become less attractive to tourists and foreign talents which will have an adverse effect on

the macroeconomic performance.

Education

The Singapore government has used education to reduce the demand for cigarettes. The

Singapore government has launched campaigns through the Health Promotion Board to

increase the awareness of the harmful effects of smoking such as heart disease, stroke, lung

cancer and chronic obstructive lung disease. It has also launched campaigns to help people

understand that smoking can cause harm to the people around them as passive smoking is

just as harmful as smoking. Further, it has incorporated the values of good health into the

school curriculum to increase the awareness of the beneficial effects of good health. All

these measures have reduced the demand for cigarettes in Singapore.


Using education to reduce the demand for cigarettes in Singapore has its benefits and

limitations. First, incorporating the values of good health into the school curriculum may

prevent young people from getting into the habit of smoking in the first place. Second,

unlike regulations on cigarettes, education on the harmful effects of smoking does not

incur enforcement costs. Notwithstanding the benefits, there are several limitations. First,

education is not legally binding which means that it is not mandatory for people to respond

to it. Second, even if it is effective, its effects will only be realised in the long run and this is

especially true for smoking due to its addictive nature.



10 MEASURES TO ADDRESS THE MAREKT FAILURE OF INCOME

INEQUITY IN SINGAPORE

Transfer payments

The Singapore government gives transfer payments in a way that benefits the poor more to

reduce income inequity. Transfer payments are payments made by the government to the

recipients not in exchange for any goods or services. Examples of transfer payments given

by the Singapore government include the Public Assistance Scheme, the Workfare Income

Supplement Scheme, Economic Restructuring Shares and New Singapore Shares.

Although high income individuals in Singapore also get transfer payments sometimes, the

amounts they receive are smaller than those received by low income individuals, resulting

in lower income inequity. However, as some of these payments are one-off, they may not

have any significant effect on income inequity. Although the Workfare Income

Supplement Scheme makes regular payments to old and low-skilled workers, it does not

help the poor who are unemployed. Further, the strict eligibility criteria of the Public

Assistance Scheme mean that some poor families do not get the cash grants.

Progressive taxes

The Singapore government imposes progressive taxes to reduce income inequity. A

progressive tax is a tax that increases more than proportionate with income. Income taxes

in Singapore are progressive. For instance, the marginal tax rate on personal income in

Singapore rises with the tax bracket which makes the rich pay a larger proportion of their

personal income in tax to the government resulting in lower income inequity. The

Singapore government also uses a progressive property tax regime with three tiers of tax

rates for residential properties granted owner-occupied concession. The annual value of a

property in Singapore is the estimated annual rent of the property if it were to be let. The

first 6000 dollars of annual value will be exempted from property tax, the next 59000

dollars will be taxed at 4 per cent and the balance above 65000 dollars will be taxed at 6 per

cent. Further, the 10 per cent tax rate on non-owner-occupied residential properties and

other immovable properties is only applicable to the rich. However, in an attempt to attract

foreign direct investments and foreign talents, the Singapore government has been cutting

corporate income tax and personal income tax. Further, the progressivity of the property

tax in Singapore is rather low.

Education subsidy

The Singapore government gives a subsidy to public schools annually for the provision of

free or subsidised education to reduce income inequity. The annual subsidy to public

schools for the provision of free or subsidised education in Singapore has made education

affordable to more poor families which will increase their income-earning power resulting

in lower income inequity. However, a major limitation of education subsidy is the long

period of time it takes for the effect on income inequity to be realised.

Edusave Scheme

The Singapore government uses the Edusave Scheme to reduce income inequity. The

Edusave Scheme was established in 1993 by the Singapore government with the objective

to maximise and equalize educational opportunities for all Singaporeans through providing



students and schools with funds for educational purposes and rewarding students who

perform well academically as well as in non-academic areas. It has also made education

affordable to more poor families in Singapore which will lead to lower income inequity.

Compulsory education

The Singapore government uses compulsory education to reduce income inequity.

Compulsory primary education in Singapore was implemented in 2003 by the Singapore

government with the objective to give Singaporean children a common core of knowledge

which will provide them a strong foundation for further education and training to prepare

them for a knowledge-based economy. It has also resulted in more poor families in

Singapore sending their children to school which will lead to lower income inequity.

However, it must be used in conjunction with free education or education subsidy to reduce

non-compliance.

Manpower policy

The Singapore government uses manpower policy to reduce income inequity. Several

funding schemes for training have been set up by the Singapore government to increase the

productivity of labour and to reduce unemployment. Examples include Skills Development

Fund, Skills Programme for Upgrading and Resilience and Workfare Training Support.

Most of the schemes are catered for low-skilled workers which lead to lower income

inequity. However, due to the effort that has to be expended on the part of low-skilled

workers, such measures may not reduce income inequity significantly.

The Singapore government uses measures that ensure the affordability of necessities such

as housing, education and healthcare. The Singapore government builds housing, schools

and hospitals to increase the supply and hence reduce the prices. In addition, these public

housing units are sold at subsidised prices, these public schools charge subsidised fees and

these public hospitals provide subsidised healthcare, all with financial assistance from the

Singapore government. Further, special provisions are made for those who cannot afford

the subsidised rates for these necessities. For instance, Medifund has been set up to help the

very poor who cannot afford the subsidised charges at public hospitals pay for their

healthcare, rental housing is provided to the very poor who cannot afford subsidised

housing and education is provided free to the children of the very poor who cannot afford

the subsidised fees.

Causes of income inequity in Singapore

Globalisation is a cause of income inequity in Singapore. Globalisation refers to the

increase in flows of goods, services, investments and labour across international borders. It

has led to a rapid expansion of the external sector of the Singapore economy compared to

the domestic sector. As a result, the profits of the firms that produce goods for export have

been rising more rapidly than the profits of the firms that produce goods for the domestic

market causing income inequity to worsen. Further, the wages of the high-skilled workers

have been rising more rapidly than the wages of the low-skilled workers due to the more

rapid expansion of the export industries that produces high value-added goods and the

more rapid decline in the labour-intensive industries causing income inequity to worsen.



Shift from income taxes to goods and services tax

A shift from income taxes to goods and services tax is a cause of income inequity in

Singapore. Income taxes in Singapore are progressive and the goods and services tax is

regressive. The Singapore government has been cutting corporate income tax and personal

income tax to attract foreign direct investments and foreign talents. In order to avoid a

budget deficit, it has been raising goods and services tax. This change in tax policy has

caused income inequity in Singapore to worsen.