Case study practice: the price of a COE

What this lesson teaches

• I can describe taxes, subsidies, price controls and quotas as ways a government intervenes in a market.

  Syllabus 9570, 2.1.3(a). Government Intervention in Markets: Governments may intervene in markets in the form of taxes, subsidies, price controls (maximum and minimum prices) and quantity controls (quotas)

• I can show how each intervention changes price, quantity, spending, revenue, consumer surplus and producer surplus.

  Syllabus 9570, 2.1.3(b). Government Intervention in Markets: Government intervention in markets can affect the equilibrium price and quantity, consumer expenditure and producer revenue, consumer surplus and producer surplus

• I can explain how price elasticities of demand and supply change the effect of an intervention.

  Syllabus 9570, 2.1.3(c). Government Intervention in Markets: Impact of government intervention on markets may be affected by price elasticities of demand and supply

Make a guess

COE premiums jump. Who decided the higher price?

1. The government, which sets the price of each COE.
2. Bidders, competing for a fixed number of COEs.
3. Car dealers, who raise COE prices to boost profits.

The extracts

Extract 1: A quota on cars

Since 1990, anyone in Singapore who wants to own a car must first win a Certificate of Entitlement (COE), which lasts ten years. The government decides how many COEs to issue, mainly based on how many vehicles are taken off the road, and buyers bid for them. Since 2018, the allowed growth in the number of cars has been set at zero, because land for roads is scarce. COE prices rose sharply after 2020, and for a time they were above $100,000, more than the price of many cars themselves. Written for these notes from public information.

Extract 2: Who drives now?

With COE prices so high, owning a car has become a sign of wealth. Some families who need a car to care for elderly parents or young children say they have been priced out. Others have switched to car-sharing services, private-hire rides and the expanding train network. Car dealers say buyers have moved towards cheaper models, while demand for luxury cars has held up well, because wealthier buyers barely notice the higher premium. Written for these notes from public information.

Extract 3: Owning or using?

Critics argue that the COE system controls how many cars are owned, not how much they are driven. Once a driver has paid a high premium, they may drive more to get their money's worth. Singapore also charges drivers for using busy roads at busy times through Electronic Road Pricing (ERP), which began in 1998. Some suggest issuing more COEs and relying more on road pricing, so that owning a car is cheaper but driving on crowded roads costs more. Written for these notes from public information.

How the 8- and 10-mark parts are marked

Data parts (1 to 3 marks)

Point-marked. A 'describe' part gives 1 mark for the overall trend and 1 for a refinement. A 'calculate' part gives marks for the working and the answer; 'explain' adds a mark for what the result shows.

8 marks: L2 (4 to 6)

Both sides are explained with clear reasoning, including efficiency and equity, and tied to evidence from the extracts. A top L2 answer develops both sides fully.

8 marks: L1 (1 to 3)

One-sided, or points listed without explanation, or little use of the case.

8 marks: E (1 to 2)

E2: a reasoned judgement in the context of the case that says what fairness means here and what the answer depends on. E1: a judgement that is stated but not explained.

10 marks: L2 (4 to 7)

Both policies are analysed with developed chains, their limits and case evidence. If only one policy is developed, the answer is usually capped at about 5.

10 marks: L1 (1 to 3)

Mostly descriptive, one-sided, or not tied to the case.

10 marks: E (1 to 3)

E3: a well-reasoned judgement on which approach better manages car use, with a conclusion. It uses criteria such as whether it targets the cause, its fairness and its side effects. E2: a reasoned judgement with less support. E1: an unsupported judgement.

Worked example: Two percentage changes

Suppose the number of permits offered falls from 40,000 to 30,000 while the number of bids rises from 60,000 to 66,000.

1. Permits: (30,000 - 40,000) / 40,000 x 100 = -25%.
2. Bids: (66,000 - 60,000) / 60,000 x 100 = +10%.
3. Bids per permit rose from 1.5 to 2.2.
4. So competition for each permit grew, which pushes the winning price up.

Watch out for this

COE premiums rose because the government raised the price of COEs.

The government sets the quantity of COEs, not the price. Buyers bid for them, so the premium rises when demand rises or the quota falls.

Check your understanding

With the number of COEs fixed by a quota, what decides how high the premium goes?

1. Demand: the more bids for the fixed number, the higher the price.
2. The cost of making the cars, which the premium has to cover.
3. The government, which sets a new premium for COEs at each monthly round.