The Certificate Of Entitlement (COE)

The Certificate Of Entitlement (COE) is a quota license that has to be successfully bid for, to allow the bidder to buy, own and use a car in Singapore. It was implemented by the government to mainly reduce traffic congestion. Since its implementation in 1990, it has had its fair share of pros and cons economically.

COE is a form of regressive taxation, A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder. (http://www.investopedia.com/terms/r/regressivetax.asp)

Diagram 1.1

Diagram 1.2

COE regulates traffic and is able to reduce a negative externality: traffic congestion which could undermine the effectiveness of private transport, that could essentially have a higher social cost than private cost. From diagram 1.1, it is evident that without COE, the traffic congestion could lead to a deadweight loss as shown as the green shaded triangle. in diagram 1.2, it is then seen that with COE taxing the consumers, there consumption of road usage would be at point A, where output is at its optimal level, resulting in a reduction of welfare loss. For example, traffic congestion would mean longer travelling time and more expensive petrol costs, especially to commercial drivers that generally drive slower vehicles. These costs could ultimately be passed on the consumers, but were averted from the taxation to reduce traffic congestion and improve efficiency.

COE is also able to reduce another negative externality: reduction of carbon monoxide emission that would ultimately affect every individual's health and therefore efficiency. The reduction of cars on the road would mean less vehicles emitting poisonous carbon monoxide.

Diagram 1.3

Being a form of tax, COE is also able to bring about tax revenue for the government to spend on other aspects that could boost Singapore's Gross Domestic Product (GDP). The increase in government spending would lead to increased spending throughout the nation, a fiscal policy that the government uses to counter regression or poor economic growth. For instance, in diagram 1.3, the increase in government spending would result in the shift of the Aggregate Demand curve to the right as the multiplier effect comes in to effect. the multiplier effect is best described as for instance the government spends $1000 and the employees decide to spend 70% of their income on fried food, the owner of the fried food shop would spend 70% of what he received from the government employees on someone else's business, this goes on and on. Hence, with COE, the government is able to use the tax revenue to boost the nation's economy.

Moreover, with COE expiring every 10 years, old cars are out phased, including those economically inefficient. With technology advancing quickly, many gadgets are continuously updated to replace a less efficient model and these changes could affect the daily expenses of consumption of resources. For instance, a car 10 years ago could consume petrol less efficiently than a new one, the inefficient consumption of petrol could lead to a dead weight loss. This could be explained just similarly to diagram 1.1 and 1.2. Hence, COE is able to remove economically inefficient models in the long run, that could allow the society to operate at a level closer to its Possible Production Frontier (PPF).

However, COE being a form of regressive tax would mean that it favours the wealthy, leading to a more distinct income gap. COE prices remains to the highest bid of COE regardless of income and the lower and middle income users are often affected more as the COE occupies more of their income than to the higher income group. COE is income elastic to the middle and lower income whereas it it income inelastic to the higher income group. Income elasticity of demand measures the relationship between a change in the quantity demanded for a particular good and a change in real income. Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain product in response to a change in consumer incomes. For instance, the change in income for the lower and middle income group could result a big change in the decision to purchase a car whereas the higher income group would most probably continue to make the purchase despite small changes to their income.

Diagram 1.4

Further, the segregation of the user groups could be inefficient in alleviating the income gap as the high income group has no restrictions to the smaller cars. It is evident in the article that the prices of COE experience mild price decreases while higher price increases where they have been experiencing a overall rise in price, even for the smaller cars. This could be because of luxury brands that have been digressing to the smaller sized cars, eventually attracting higher income consumers to bid for the smaller car COEs. From diagram 1.4, it can be seen that an increase in demand would lead to an increase in price. Hence, COE could lead to a distinctly wide income gap.

Moreover, the increase in COE prices would lead to cost increases for businesses, leading to these costs transferred to consumers in terms of price hikes. Many businesses in Singapore require transportation of their resources on a regular basis, and when the cost of owning a commercial vehicle to transport goods rises, the business would transfer their cost hikes to the consumers. This would lead to consumers paying more for the their goods and services. Hence, COE could lead to a poorer standard of living from the higher prices of goods and services the society pays.

Additionally, the consistent overall rise in COE prices would lead to expectations of higher prices in the future, leading to unstable and unhealthy spending of the economy. Buyers make buying decisions based on a comparison of current and future prices. They are motivated to purchase the good at the lowest price possible. If that lowest price is the one existing today, then they will buy today. If that lowest price is expected to occur in the future, then they will wait until later to buy. For instance, these unhealthy spending could affect car-related industries and they would not be able to make decisions for the long run. Hence, COE could affect the economy through unstable and unhealthy spending.

Next, the high prices of COEs could lead to social costs arising such as reckless drivers thinking that they own the road for the amount they paid. This could lead to increase risk of accidents that would affect the economy as accidents are financially costly. The unnecessary costs would result in inefficient allocation of resources, that would lower the nation's economic growth. Hence, COE could also lead to social costs arising such that they reduce the productivity of Singapore.

Possible suggestions

-separate luxury car COE

-balloting

-rise in effeciency of public transport such that consumers would rather take them. consider the recen spate of breakdowns and bad jam.

Source: Essay UK - http://ntechno.pro/free-essays/finance/certificate-entitlement.php


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