Failing to understand basic economics

by Joseph Teo

In the Straits Times, 12 February 2011, an article by Rachel Chang and Andrea Ong titled “Wrestling with the beast – again” was published.  The article deals with the rising costs of living and explored some possibilities for managing it.  However, the article showcased some of the government’s fundamental lack of understanding of how free markets operate.

In the discussion of whether wet markets and hawker centres should be privatized, the authors present an argument that the privatization of these “public” arenas leads to rising rents and in turn rising prices.  They then cite Case President Mr. Yeo, and MP in Aljunied GRC who maintained that privatized hawker centres and coffee shops provides choices for consumers.

“It is just like health care,” he says.  While there are private clinics for those who would rather wait less and pay more, there is also the low-cost polyclinic option.  Similarly, there are consumers who do not mind paying more for their chicken rice at an air-conditioned foodcourt. “As long as there is a public option to stabilize prices, it is all right to have privatized hawker centres,” he says.

Thus far, everything makes sense, except when we apply it to the real world.  Hawker centres and wet markets serve a community.  It is a location-based service.  If you remove or privatise the hawker centre at Bedok central, and claim that a “public option” still exists because there is a hawker centre in Yishun, Marine Parade, or even Chai Chee, you would be grossly mistaken.  How would travelling to a Chai Chee hawker centre to buy a $3 packet of chao guo tiao be an option instead of paying $4.50 or $5 a packet at a privatized expensive food court just outside your home in Bedok?  After adding the bus fare and time to and from Chai Chee, the $3 packet would be more expensive.

Removing the wet market or hawker centre in the community removes the “public option” that Mr. Yeo claims is necessary to stabilize prices.  Options work to stabilize prices only if the goods and services are substitutable.  A hawker centre in Chai Chee does not substitute for a hawker centre in Bedok.

Another example of failing to understand this basic economic concept of substitution of goods and services is the Electronic Road Pricing (ERP) scheme.  When first conceived, it was meant to control road traffic by providing differential pricing and thus directing price-sensitive traffic towards routes that were perhaps longer but had unused capacity.  However, as it is practiced today, all major roads leading from East to West, from North to South, from West to East, and all around the city are covered in ERP gantries.  There are no alternate routes.

So what purpose does the ERP serve today?  Perhaps it is to push the car-driving population towards public transport, like trains, for instance.  Except that our trains are overcrowded – a fact first denied by the CEO of SMRT, and then admitted by the Prime Minister at the National Day Rally.  Again trains serve as no substitute.

Therefore, the ERP serves no policy purpose, since there is little other choice for the majority of car drivers.  It only serves as a tax on the car driving population.

Perhaps there is a need to revisit some basic economic texts and review our policies in light of these established principles.  In the meantime, I look forward to the impending demolition of my favourite childhood, neighbourhood, and economical hawker centre and Bedok central with a great deal of trepidation and regret.