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Prices & Market Assignment 2
Prices & Market Assignment 2
Prices & Market Assignment 2
Bigger baby bonus and Medisave grants for parents, an article in The Straits
Times, attached.
The question for the analytical exercise is: The baby bonus is a form of
government intervention. Which market failure do you think the government is
mainly trying to correct with this bonus, and how?
COST OF
HAVING
BABIES
External
Benefit
[SocialCost=(Private cost
externalities)]
P
P
0
LEGEND
Demand (private
benefit)
QM QOP
QUANTITY OF BABIES
Due to ageing population, government intervenes to correct the negative market failure by
increasing baby bonus to subsequent child birth. Each additional child will provide benefit to
society to replenish the workforce. With a successful intervention, parents will bear a lower
cost for producing babies subsidised by government, thus promoting higher birth rate.
Therefore resulting in the shift of supply curve to S2 after receiving external benefit from the
original S1. Government will increase baby bonus to reach out to the social optimal number
of babies (QOPT). This will result in more economic growth and higher income for the nation.
Domestic
Supply
LEGEND
= Producer surplus (EU surplus)
= Consumer surplus (Singapore
consumer surplus)
= Deadweight loss due to tariff
= Revenue that Singapore
government earns
P
World Price
+ Tarif
World Price
P1
A
Q1 Q2
=Domestic Price
Tariff
Q3 Q4
QUANTITY GOODS
Cost
Diseconomie
s of scale
Economie
s of scale
0
Constant
returns to
scale
Quantity
Economies of scale occur when the long run average total cost declines as
output increases.
With larger vessels, the shipping companies incur higher total cost from the
vessels but total output from the vessels will increase significantly higher than
the total cost. Therefore, in a long run, the cost will be reduced as larger vessels
will have more capacity to carry goods and thus achieving economies of scale.
Another alternative way to achieve economies of scale can be by specialisation
of job scope and division of labour. With proper specialisation, the output will
increase with the same amount of cost.
Word Count: 100