Preliminary Examination 2013

• This is due to the increase in Residential property which could be attributed to the following factors:

• Increasing household income with a “buoyant economy”
• Availability of housing loans with “low interest rates”
• Lifestyle changes
• Speculators fuelling increase in investment demand

• State and explain clearly a reason for an increase in demand. [2]

• Interpret that the phrase “it takes time for supply to catch up with demand because of the period required for construction” meant that supply of housing is likely to be price-inelastic (make reference to Extract 2). [1] Thus any increase in demand would like to a sharper increase in prices. [1]

• There is a positive correlation between the prices of Residential property and Commercial property.
• They are substitutes in production (or in competitive supply) as URA land parcels are “earmarked for competing uses such as for commercial, hotel and private residential developments” (Extract 2). Land resource is a common factor of production that can be used for development of commercial or private properties. [1]
• Illustrate diagrams showing both markets of Residential and Commercial property. [1]

• Explain briefly the diagrams. As demand for residential property increases, the price of residential property increases. The quantity supplied of residential property increases from Q0 to Q1 in Figure (a), in accordance with law of supply. [1]
• Thus, at each possible price, there is less land available for construction of commercial property. Thus causes a fall in supply from S0 to S1 of commercial property, leading to an increase in its prices, as seen in the increase in price from P0 to P1 in Figure (b). [1]

• Public housing projects are able to enjoy internal economies of scale given the larger scale of production as compared to private housing projects (e.g. condominium projects). [1]
• Any reasonable explanation of economies of scale applied to the housing market will be awarded the mark. An example could be marketing economies as public housing projects are able to obtain bulk discounts when procuring construction materials. [1]

• A number of measures had been implemented to curb increasing property prices, which include both demand-side and supply-side measures.

Body Elaborate on at least 2 of the following measures with clear links to the impact on the housing market.

• Additional Stamp Duty ïƒ curbs speculator demand as it deters potential investors ïƒ fall in DD of housing ïƒ downward pressure on property prices

Evaluation:

• This may be effective as speculative demand may be significant in a buoyant housing market. This measure allows the government to curb housing demand without hurting the genuine home buyers.
• This may deter FDI from S’pore which would result in negative impact on our macroeconomy. A fall in FDI would result in a fall in injections to AD, thus via the multiplier effect, result in a more than proportionate fall in nominal National Income, compromising on actual economic growth and cyclical unemployment. Fall in FDI may also compromise on potential economic growth.

• Housing Loan Limits ïƒ difficulty in obtaining housing loans ïƒ limits households ability to purchase housing ïƒ fall in DD of housing ïƒ downward pressure on property prices

Evaluation: However it is stated in Extract 3 that there are “low interest rates” and that “(m)any households have amassed cash reserves which can be put down as a deposit for a property” which limits the effectiveness of the above measure in reducing housing demand.
Evaluation for DD-side measures:

• The mentioned measures do not necessarily target the other core reasons that drive up demand for housing. As mentioned in Extract 3, “healthy economy”, “shallow capital markets” and “lifestyle changes” are some factors causing an increase in demand for housing.
• Largely effective though as Supply of housing is relatively price-inelastic. Thus any small changes in demand would lead to significant fall in prices (explain clearly with aid of diagram).

• Increase supply of HDB flats/ Increase supply of land parcels for Private Residential projects ïƒ downward pressure on property prices

Evaluation for SS-side measures:

• It takes time for housing projects to be completed and thus this is more of a LT measure and should be complemented with cooling demand-side measures.
• Effectiveness is also dependent on PED for housing, which could differ depending on the type of housing.

Conclusion/ Evaluate

• Candidates are to evaluate on the effectiveness of the above measures.
• Both demand-side and supply-side measures are required to address the rising prices as the causes are multi-faceted.
• Measures are not likely to be effective as data shows that housing prices are still rising (ref. to Table 1).
• Whilst stamp duty and loan limits are effective ST measures, the government needs to consider LT measures to address the fundamental changes in the housing market.

• Identify the various sources of market failure in the housing market:

• Income inequity
• Merit good (for genuine home-buyers/ owner occupied housing)

Body Thesis: Government provision is necessary as it helps to solve the market failure present in the housing market.

• Explain that there are positive externalities of public housing where the creation of “cohesive communities” help to “support national objectives such as maintaining racial harmony and stronger family ties” (Extract 4). As such public housing is deemed to be socially desirable and is a merit good. Public housing is likely to be under-consumed due to the presence of imperfect information whereby households are unaware of the full benefits of public housing.
• Also, this allows the government to develop projects such as the “Green Neighbourhood” (Extract 4). As such, there are other external benefits of consumption of such public housing projects as compared to other private housing projects.
• Explain clearly with the aid of the benefit-cost framework, how there would be an under-consumption of housing if to the private markets, and thus there is a need for the government to intervene to increase the consumption of housing.
• In addition, public housing also help to address the income inequality in an economy as the government strives to provide public housing at affordable prices.

Anti-thesis (i): Government provision is not necessary as it may result in government failure.

• There could be government failure where the government estimates incorrectly the housing demand and supply. Asymmetric information is present, and this has resulted in insufficient supply of HDB flats to cope with the increasing demand.
• As the sole provider of HDB flats, and thus as one of the major players in the housing market, the government has significant market power. This may result in both productive inefficiency and X-inefficiency due to the lack of competition.

Evaluation: With a large scale of production, with the provision of public housing, the government is able to reap internal economies of scale and pass on these cost savings to potential home-owners in terms of lower prices for public housing.
Anti-thesis (i): Government provision is not necessary as there are other methods of intervention or private producers are able to adequately provide for the markets.

• Instead of direct provision, government can consider subsidising private housing market projects instead. This would effectively lower the MPC so as to increase the consumption of housing (explain with the aid of benefit-cost diagram). Such private projects are likely to be of greater variety, for example, condominiums with various amenities such as pool, bbq pit etc.

Evaluation: Subsidies would likely result in a strain on the government budget.

• Changes to government regulation to encourage consumption of housing by genuine home-buyers/ owner occupied housing. Government perhaps could reduce restrictions on genuine home-buyers so as to encourage consumption of housing. For example, banking regulation can help ease the availability of housing loans to such genuine home-buyers i.e. first-time home-buyers. Otherwise, direct subsidies can be given to genuine home-buyers.

Evaluation: It may be difficult to distinguish between demand from genuine home-buyers and speculative demand. Thus, the encouragement of demand of genuine home-buyers may fuel further increases in property prices, worsening the problem identified in part (e).
Conclusion

• It depends on the characteristics of the economy. For a land-scarce economy such as Singapore, it is important to ensure that efficiency of land use is achieved. Given that Singapore economy is small, estimation errors are unlikely to be significant and thus government should provide for public housing to address market failure problems such as concerns of under-consumption as well as income inequality concerns.
• Whilst government should step in to provide public housing, it should also regulate and allow the development of private housing developers so as to complement its efforts. This would keep the housing market contestable and ensure a variety of housing options for potential home-buyers.

• Advanced countries faced high government debt which caused greater financial instability and loss of confidence, resulting in a smaller increase in investment and consumption spending. The outlook for emerging economies was more positive as they did not suffer from high government debt, resulting in larger increases in C and I. The AD and hence NY rose faster for emerging economies.
• Advanced countries were constrained from pursuing expansionary fiscal policy by their high government debt, whereas emerging economies were not. As such, emerging economies could rely on large fiscal stimulus to boost domestic demand and stimulate economic growth, thus recovering faster.
• The negative outlook in advanced countries caused capital to flow out to emerging economies. The capital inflow leads to an increase in I and hence increase in AD in emerging economies which stimulates economic growth via the multiplier effect. This allows emerging economies to recover faster.
• Advanced countries may be more integrated among themselves in terms of trade and financial flows, so their economic downturn affected one another more adversely. Since the fall in AD was larger, it took a longer time for them to recover. Emerging economies, on the other hand, were able to continue growing through trading among themselves, and were less affected by the recession in the advanced economies. Their AD did not fall as much and could increase more quickly due to the increase in (X-M) after the recession.

• The economic recovery in 2010 and 2011 may cause the GDP to increase more than the rise in government debt.
• There could be bailouts given by the EU or IMF which help to reduce the government debt
• The creditors of the government debt may have decided to “forgive” or write-off some of the debts, thereby helping to reduce the government debt of these countries.
• Falling interest rate may help to reduce the debt burden (which includes the interest payments). Hence the proportion of government debt is reduced.

• Subsidies to reduce cost of production (as above)
• Reducing structural rigidities eg. wage guidelines to recommend flexible wages or wage cuts
• Increasing labour force (eg. foreign labour or encouraging women to work) to reduce labour costs.

Conclusion (Overall assessment): Given the uncertainties of the external environment and the economic slowdown US is experiencing, the government will need to adopt expansionary demand management policies to boost its domestic demand. However, the high US government debt makes fiscal policy inappropriate, leaving the government with the choice of monetary policy or exchange rate policy. According to the Mundell-Fleming policy trilemma, US being a country with free capital mobility, will have to choose between adopting monetary policy and exchange rate policy. However, given that US interest rate is already very low, any increase in money supply will not reduce interest rate very much. Instead, it could cause capital outflow due to the surplus liquidity in the financial markets, leading to a fall in the US dollar exchange rate. However, as there are also supply side factors such as the rising oil prices, the government should complement the demand management policies with supply-side policies to reduce the costs of production and shift the SRAS. Such a combination of policies will help the US government to sustain economic growth in the face of the various threats mentioned in the case study.

• State that revenue earned is determined by equilibrium price and quantity in the market for both electronic (e-cigarettes) and conventional cigarettes.
• Recognize that e-cigarettes and conventional cigarettes are substitutes in consumption and therefore revenue in one market is also affected by changes in the price of the substitute good.

Body :
Conventional cigarette market

• Explain that a continuing tax hike by governments around the world increases the cost of production for conventional cigarette firms, there resulting in a fall in supply for conventional cigarettes.

• Explain that the demand for conventional cigarettes is likely to be price inelastic, i.e PED

With reference to figure 1, given the relatively price inelastic demand curve of conventional cigarettes, a leftward shift of the supply curve from S₀ to S₁ results in a less than proportionate fall in quantity demanded from Q₀ to Q₁ to the increase in its price from P₀ to P₁, ceteris paribus. Revenue earned in the conventional cigarettes market increases as the rise in revenue (area A) due to the increase in price is greater than the fall in revenue (area B) due to the fall in quantity demanded.


E-Cigarette Market

• Explain that the effect of changes in the e-cigarette market on its revenue is dependent on the values of PED and XED.

PED

• Explain that the demand for e-cigarettes is likely to be price elastic, i.e. PED > 1.

Smokers are likely to consider conventional cigarettes as a good substitute to electronic cigarettes. In addition e-cigarettes to social smokers, i.e. smokers who smoke only for leisure as part of a social group, is but one of many means / tools of socialising for them and therefore the degree of necessity is low in terms of consumption.
With reference to figure 2, as more new firms are attracted to the e-cigarettes market the supply of e-cigarettes producing firms will increase. Given the relatively more price elastic demand curve D₀ , a rightward shift of the supply curve from S₀ to S₁ will see a more than proportionate rise in quantity demanded from Q₀ to Q₁ to the fall in price from P₀ to P₁ , ceteris paribus.
Revenue earned in the e-cigarettes market will increase as the fall in revenue (area A) due to the fall in price is less than proportionate to the increase in revenue (area B) due to the increase in quantity demanded, ceteris paribus.
Figure 2 – Market for e-cigarettes
A
B
XED > 0 (substitute in consumption)

• Explain that both conventional and e- cigarettes are substitutes in consumption. This means that an increase in the price of conventional cigarettes will lead to an increase in demand for electronic cigarettes. However the extent of the increase in demand for e-cigarette is dependent on the value of XED.
• Explain that the cross elasticities of e-cigarettes with respect to conventional cigarettes is likely to be high and positive, i.e. XED > 1.

E-cigarettes and conventional cigarettes are strong / close substitutes for smokers addicted to nicotine, and therefore have high positive cross elasticities. A high and positive value of XED means that for a given increase in the price of conventional cigarettes this will lead to a significant increase in the demand for e-cigarettes, ceteris paribus.
With reference to figure 3, as the price of conventional cigarettes increases, quantity demanded will decrease. According to the Law of Demand, there is an inverse relationship between price and quantity demanded, ceteris paribus. And as the quantity demanded for conventional cigarettes decreases, the quantity demanded for e-cigarettes will increase at every price levels given that they are substitutes in consumption. And if XED > 1, this results in a significant increase in the demand for e-cigarettes as illustrated by a rightward shift of the demand curve for e-cigarettes from D₀ to D_2.
Price of conventional cigarettes
P₁
P₀

Q₁
Evaluation :
Not all smokers addicted to nicotine consider e-cigarettes and conventional cigarettes to be strong / close substitutes in consumption. To these smokers, the experience of smoking from a metal tube (e-cigarettes) is unlike smoking the real thing (conventional cigarettes). To these smokers the overall experience of smoking a conventional cigarette is irreplaceable, from having to tap the conventional cigarette stick thereby packing in the tobacco to being able to taste the tobacco as they put that cigarette stick to their lips. As such, e-cigarettes and conventional cigarettes are weak substitutes with positive cross elasticities values ranging between zero and one, i.e. 0
With 0 demand for e-cigarettes is to a relatively smaller extent as compared to the increase in price of conventional cigarettes.

• Explain the importance of considering the values of PED and XED, and the rightward shift in supply due to the increase in the number of new firms in order to analyse the effect on revenue earned in the market for e- cigarettes.

• Explain that the overall effect on revenue earned in the e-cigarettes market is dependent on the extent of the shifts its demand and supply curves. Thus, this gives rise to a resultant equilibrium price that is uncertain although the quantity transacted of e-cigarettes will increase.

(note : candidates are not required to draw the many different permutations of the differing extent of shifts in demand and supply curves to illustrate the effect of changes on revenue earned in the e-cigarette market. A well reasoned explanation(s) with at least one diagram to illustrate understanding is sufficient.)

• Explain that it is likely that demand for e-cigarettes is price elastic and that the cross elasticities of e-cigarettes with respect to conventional cigarettes is high and positive, i.e PED > 1, XED > 1. The extent of the shift in demand is likely to be more than the extent of the shift in supply in the market for e-cigarettes for “sales of e-cigarettes have doubled which attracted new firms into the market”.

Figure 4 : Markets for e-cigarettes and conventional cigarettes
Price of e-cigarette S0
Price of conventional cigarettes S₁
S2 S0

E₂ P₂
P₁

P0
D2 P₀

D₀
D₀
Q₀ Q1Q1 0
Q₂Qty of e-cigarette Q0
Qty of conventional cigarettes

With reference to figure 4, as the price of conventional cigarettes increases, demand for e-cigarettes increases significantly since XED > 1. The extent of the shift in demand is more than the shift in supply in the market for e-cigarettes, thereby giving rise to the resulting equilibrium price of P₂ and equilibrium quantity at Q₂. Revenue earned in the e-cigarettes market increases and is given by the area OP₂E₂Q₂.
Conclusion / Evaluation

• The effect of changes on revenue in the markets for conventional and e-cigarettes depends on the values of PED and XED, as well as the relative extent of the shifts in demand and supply in the e-cigarettes market.

Knowledge of elasticity values in the respective markets allows cigarette manufacturers an opportunity to implement strategies aimed at increasing the revenue earned for their respective firms in the relevant market.

• Reap internal EOS (Any well explained sources of internal EOS)

SingPost’s growth will increase its scale of production and enable it to reap substantial internal EOS and gain cost advantages. These cost savings can also be passed down to consumers in terms of lower prices.

• Increase total revenue (Any well explained reason)

Increase no of consumers By expanding in the e-commerce business, SingPost is able to diversify its business and capture a greater consumer base. SingPost’s online shopping platforms, vPOST and Clout Shoppe provide consumers with more convenience and choices when they shop online.
Increase Diversification Expanding in the e-commerce business allows SingPost to diversify its business and increase sales volume from new products and new markets. Product diversification involves addition of new products to existing products.

• Dynamic efficiency

SingPost is able to sustain its supernormal profit in the long run from its dominant position in the mail and delivery industry. Coupled with the probability of earning higher profit from diversifying its business and expanding in the e-commerce industry, SingPost is able to attain dynamic efficiency as it develops a more efficient production technique to produce goods and services, lowering its LRAC.
Consumers

• Increase consumer choice and welfare

SingPost’s expansion in the e-commerce industry will increase the level of competition in the industry, and hence provide a greater variety of choices for the consumers to choose from i.e. a more competitive online shopping platform where consumers are able to gain access to more products and brands online.

• Lower price, higher output and increase consumer surplus

With the increased competition, demand for e-commerce services will become more price elastic due to the availability of more close substitutes. As such, firms in the e-commerce industry will have less market power to set price above marginal cost and restrict output sold, resulting in a higher consumer surplus.
Other firms

• Less likely to suffer from X-inefficiency

SingPost’s entry in the overseas market will increase the level of competition in the mail and delivery industry. Dominant firms like United Parcel Service of America (UPS) and Deutsche Post DHL will face a stronger competition and a reduction of their supernormal profits earned in the long run. This will have less incentive to lax about cost controls and less likely to suffer from X-inefficiency.

• Dynamic efficiency

With the increase in the level of competition, dominant firms like United Parcel Service of America (UPS) and Deutsche Post DHL, including SingPost have more incentive to make use of their supernormal profits earned in the long run to engage in R&D and develop a more efficient method to produce goods and services. As such, they are able to attain dynamic efficiency as more goods can now be produced from any given amount of resources. Costs are lowered and lower prices are charged to consumers.
Negative impacts:
SingPost

• X-inefficiency

As SingPost diversifies its business, expands in e-commerce and overseas market, and earns greater supernormal profits in the long run, it could lax in cost controls and suffer from X-inefficiency. For instance, SingPost could pay large amount of rents to locate their offices in prestigious locations in overseas or not use the most updated and efficient production methods. Such higher costs may be passed on to the consumers in terms of prices.
Other firms

• Unable to reap internal EOS

Smaller firms in the e-commerce industry will be left with less market share when SingPost enters the industry. They will not be able to reap substantial internal EOS to compete with SingPost and offer lower prices to consumers; hence they will need to rely on non-price strategies to compete, i.e. offering personalised services to consumers.

• Decrease in total revenue

With the increase in competition from SingPost, smaller firms in the e-commerce industry are likely to experience a fall in demand of their goods and services as consumers turn to SingPost’s online platforms i.e. vPOST and Clout Shoppe which provide more attractive offers.
Likewise, firms like United Parcel Service of America (UPS) and Deutsche Post DHL will now face a fall in the demand of their mail and delivery services, as SingPost diversifies its business and enters the e-commerce and overseas market.
With an increase in total cost and a reduction in total revenue, profits of other firms will fall.

• Forced to leave the industry

The increase in competition when SingPost enters the e-commerce industry will result in smaller share of profits earned by the smaller firms. As such, they have no ability to devote their profits to Research & Development (R&D) efforts, which is essential in the e-commerce industry to provide consumers with better quality of goods & services. Examples of better quality and high technology services include domestic and international payment systems, efficient automated online assistants and order tracking.
In the long run, these smaller firms will find themselves losing their consumers to SingPost and may not be able to remain in the industry. This is especially so as SingPost’s dominant position in the mail and delivery industry will enable it to use its supernormal profits earned to innovate in high technology e-commerce services for its consumers, for instance providing both advanced data security and high frequency of page loads to increase the sales conversions and the number of shoppers checking out their online stores. This will affect the smaller producers, which do not have the relevant resources to engage in such non-price strategy, product differentiation and innovation to compete with SingPost and might be forced to leave the industry.
Consumers

• Higher price

If SingPost lax in cost control and suffer from X-inefficiency, these higher costs may be passed on to the consumers in terms of higher prices, such as higher postage and delivery fees or e-commerce sales charges. Likewise, firms in the e-commerce industry as well as mail and delivery services industry who now produce at a lower scale due to the fiercer competition faced from SingPost, may no longer be able to reap substantial internal EOS and enjoy the cost savings. Hence they have no choice but to charge the consumers at higher prices.

• Decrease consumer choice and consumer surplus

If the smaller firms in the e-commerce industry are able to compete with SingPost and are forced to leave the industry in the long run, consumers will be left with limited choice and access to products and brands online. On the extreme end, if SingPost capture a significant market share in the e-commerce industry, it might over exploit the consumers by charging them at high prices and restricting the output, decreases the consumer surplus.
Evaluative Conclusion:
SingPost’s growth strategies will allow SingPost to diversify its goods and services, as well as increase the level of competition in both the e-commerce industry and international mail delivery industry. The increase in level of competition will benefit the consumers in terms of greater consumer’s surplus and welfare as they face lowered prices, greater availability of choices and quality goods in the markets.
However, the impact on producers will vary for SingPost and its competitors in the e-commerce industry and international mail delivery industry. In the e-commerce industry where a large number of smaller firms are present, the entry of a dominant firm like SingPost in the industry will have an adverse effect on these smaller firms in terms of their revenue and profits earned. They are unlikely to compete with SingPost which has the resources to engage in product innovation and differentiation to capture a greater market share, and get rid of its competitors. As such, these smaller firms will not be able to survive in the e-commerce industry in the long run, which might lead SingPost to over exploit the consumers, if it is left with significant market power in the e-commerce industry to do so.
SingPost’s strategies to diversify its business, expand in the e-commerce and overseas market will serve as threats to the dominant firms i.e. United Parcel Service of America (UPS) and Deutsche Post DHL in the international mail delivery industry. It will provide them with more incentive to be cost efficient and engage in product innovation to keep their market share, which will ultimately benefit consumers in terms of lowered prices and higher quality products.

• Explain that market failure refers to a situation in which markets produce undesirable outcomes. Resources are not allocated efficiently and/or optimally (i.e. equitably).
• Explain market dominance
  Due to high barriers to entry, imperfect information or unique products, firms may have high market power which allows them to dominate markets, influencing prices, rather than having prices determined by market forces. Monopolies and oligopolies tend to have such market dominance.
• Explain immobility of factors of production
  Factor immobility refers to the inability of a factor of production to shift from one use to another, even in response to large changes in remuneration.

Body

• Explain why the presence of market dominance (and immobility of factors of production) can lead to market failure

• The presence of market dominance may lead to firms enjoying monopoly power and hence there is imperfect competition and the presence of firms such as monopolies and oligopolies may result in the ‘wrong’ quantity being produced at too high a price, and the market outcome being allocatively inefficient.
• The immobility of factors of production may also create barriers to entry resulting in firms enjoying monopoly power and hence leading to imperfect competition

• Socially optimum level of output is at Q_PC where total welfare to society is maximised.
• In an imperfect market, assuming that the monopolist seeks to maximise profits (where MR=MC), it has the incentive to restrict production at output Q_M and charge price P_M.
• By under-producing output Q_MQ_PC, the potential social benefits lost (area Q_MABQ_PC) is greater than the potential social cost incurred (area Q_MCBQ_PC), leading to a fall in the net benefit to society (area ABC). This is also known as the deadweight loss to society due to an allocatively inefficient level of production.

• Explain why immobility of factors of production can lead to market failure

• Factor immobility may be due to Occupational Immobility
  Factor immobility may be due to Geographical Immobility
• Factor immobility prevents the switch to the production of new goods and services most valued by society, in the quantity required, thereby resulting in allocative inefficiency while the unemployment of immobile factors results in productive inefficiency.

• Globalisation refers to the increasing integration of national economies in terms of financial flows, trade, movement of factors of production, ideas, and changes in information and technology.
• As explained in (a), market dominance and immobility of factors of production lead to market failure. Problems associated with market dominance include high prices, low output, allocative inefficiency, lack of dynamic inefficiency and inequity. Problems associated with immobility of factors of production include structural unemployment.

Thesis: Globalisation has reduced the problems associated with market dominance and immobility of factors of production Effect on Market Dominance

• With falling trade barriers, there is increasing competition in many markets because of the increase in imports. Cheaper imports from developing countries may enter the markets in developed countries, resulting in more competition.
• There may be a change in market structure from a monopoly to oligopoly or from oligopoly to monopolistic competition as market concentration ratios of top firms fall.
• The increasing competition also increases the incentive for firms to differentiate their products through innovation and R&D. This may reduce inequality problems to some extent as firms may have to channel their supernormal profits previously gained from their market dominance, to improving their products instead. Consumers also benefit from enjoying a greater variety of products (both because of a wide range of imports as well as R&D efforts of domestic firms) as well as possibly higher quality of products. If the R&D efforts are successful, there may be dynamic efficiency which results in lower costs for firms. These costs savings may also be shared with consumers in the form of lower prices in the long run.
• With greater flows of ideas and technology brought about by globalisation, there may be greater sharing of technology which smaller firms can tap, in order to compete more effectively. This could also result in a greater variety and higher quality of products for consumers to enjoy.
• If domestic firms were facing problems of X-inefficiency due to market dominance which resulted in their complacency, increasing competition would also force them to produce on the LRAC and be productively efficient.
• Consumer welfare increases and the associated problems of high prices, little variety and high allocative inefficiency are reduced.

Effect on immobility of factors of production

• With globalisation, there are increasing flows of labour between countries as transport costs are lowered and there are less restrictions on labour flows between countries
• Industries may hire foreign workers if their skills match their needs. Similarly, if workers are unable to find jobs which require their skill set, they can move to other countries with a demand for their labour.
• With more outsourcing and offshoring, labour may also not have to move overseas as foreign firms might choose to set up factories overseas instead. This helps to solve the problem of geographical immobility where workers were unemployed because of their reluctance to leave their homes.
• Thus globalisation reduces the problem of unemployment and thus productive inefficiency to some extent. For industries that had problems hiring sufficient and appropriate workers, their problems are also reduced to some extent.

Antithesis: Globalisation has not reduced (but has increased) the problems associated with market dominance and immobility of factors of production Effect on market dominance

• While globalisation may lead to increasing competition and therefore a fall in the problems associated with market dominance, it may also lead to other problems.
• If competition is too intense, domestic firms may not be able to compete and may be forced to leave the industry.
• Also, in industries with very high barriers to entry, a local monopoly may become a global monopoly, thereby increasing its market power and dominance.
• These problems may also lead to income inequality issues. Globalisation tends to benefit firms with comparative advantage but tends to hurt firms without comparative advantage. This results in a widening income gap within countries which may result in social problems.
• Increasing competition also may result in an erosion of supernormal profits of firms. Firms have less ability to do substantial R&D which may not be beneficial to consumers. Thus globalisation may not necessarily have only reduced the problems associated with market dominance but it may have reduced the benefits that come with market dominance as well.

Effect on immobility of factors of production

• While globalisation may lead to greater mobility of factors of production across countries and therefore a fall in problems associated with labour immobility, it may also create other problems.
• Immobility of factors of production within a country may still be large unresolved. For example, occupational immobility occurs due to a lack of ability to switch between jobs in different industries. This could be due to a mismatch of skills. For example, in developed countries, as low skilled jobs are lost to outsourcing, there is structural unemployment amongst low skilled workers. These workers may not be able to find a job because the jobs in supply are those which require high skills. Thus structural unemployment worsens in developed countries if these workers cannot relocate to regions which require their skills.
• Due to structural shifts in an economy as countries specialise and trade according to comparative advantage, export oriented industries with comparative advantage would see an increase in demand for labour. However industries without comparative advantage would see a fall in demand for their goods and therefore a loss of jobs, resulting in greater structural unemployment.
• With increasing specialization as countries focus on their comparative advantage to reap the benefits of specialization and trade, workers may also have increasingly specialized skills. If there are changes in world demand, industries which face a fall in demand might suffer and workers in these industries may not be able to switch jobs if they lack the necessary skills.
• All of these worsen the problems associated with occupational immobility.

Synthesis: Whether or not globalisation has reduced the problems associated with market dominance and immobility of factors of production depends on

• The type of industry
  In some industries, due to the large number of imports, market dominance has greatly reduced, improving consumer welfare. For example, clothes and shoes made in China, India and Vietnam are being exported to many developed countries, bringing down prices and increasing output and variety. Firms in developed countries are forced to innovate to remain competitive.
• The MES of the industry
  For industries with large MES, global dominance may lead to greater fall in average costs which would not have been achieved if output was produced only for one domestic market. This may lead to lower prices and greater consumer welfare and may not necessarily cause problems.
• The government policies in place to manage globalization

For example, many developed countries have anti-competitive laws which punish firms that abuse their market power. If firms are found engaging in anti-competitive behaviour, they may face harsh penalties such as hefty fines. This prevents the likelihood of large MNCs abusing their market power and exploiting their consumers or workers. However, if governments impose protectionist policies to protect domestic firms, then these firms may still have high market power and the associated problems that come along with their market dominance may still remain.
Similarly, if there are policies in place to help workers upgrade their skills, the problems associated with factor immobility may not be so severe. If workers are able to upgrade their skills and find jobs, structural unemployment may not be a severe problem even with globalisation.

• State that Singapore’s characteristics of a small open import-reliant export-led economy expose her vulnerability to external shocks. As such imported inflation is a main cause of inflation in Singapore.
• However there are other domestic factors contributing to Singapore’s rising inflation rate.

Body: Thesis : A switch from a regime of managing exchange rates to a regime of managing interest rates to control for inflation is valid.

• Explain that domestic causes of inflation have been significant contributors to rising inflation rate in recent years as a result of higher cost of housing. (an explanation of either domestic cause will be sufficient)
• For example, consumer expenditure on the housing has increased in recent years. This is due to the rapid increase in demand of housing. The demand for (private) housing is mainly by speculative foreign buyers and citizens, while the demand for public housing is in general by genuine home owners. An increase in autonomous consumer expenditure on housing will lead to an increase in AD resulting in demand pull inflation.
• A switch to a regime of managing interest rates will mean managing the cost of borrowing for buyers and hence consumer expenditure on housing. A rise in interest rates increases the cost of borrowing which can lead to a fall in demand for housing. The fall in consumer expenditure on housing reduces demand pull inflationary pressures as AD falls since C is a component of AD.

Anti-Thesis: A switch to a regime of managing interest rates to control for inflation is not valid.

• Explain why imported inflation is the main external cause of inflation in Singapore.

Singapore is small in size and lacking in scarce natural resources. This means that we are dependent on imports for basic necessities, and raw materials & intermediate goods necessary for the production of goods.
Imports make up 40% of domestic consumption. Domestically produced goods, which are also exported, have high import content. This means that our domestic prices are very much dependent on foreign prices and hence are affected by changes in external prices. Given Singapore’s small size, she is a price taker in world markets. Any increase in foreign price will lead to higher domestic prices resulting in imported inflation.

• Explain the importance of maintaining a regime in managing exchange rate to control for imported inflation.

Singapore’s total volume of trade (exports and imports) is about 400% of GDP. The importance of imports in the Singapore economy means that exchange rate has an important influence on domestic cost of production, which also has an impact on export competitiveness. A regime of managing exchange rates will ensure that key factor inputs, which are essential for survival and in the production of exports, will be at prices that will not result in Singaporeans facing excessively high general price levels or that will result in our exports losing competitiveness.For example, to mitigate the negative effects of imported inflation caused by a rise in world price of oil, the Monetary Authority of Singapore (MAS) allows an appreciation of the S$.

• Explain that Singapore’s small size openness to capital flows makes it difficult to target interest rates to control for inflation.
• Singapore’s small capital market underscores the importance of attracting capital from abroad to supplement small domestic capital market. In addition, Singapore’s role as an international financial centre means that the economy is very open to capital flows. Small changes in relative interest rates would lead to large and quick movements of “hot money” making it hard to target money supply. Domestic interest rates are determined interest rates of other larger economies and expectations of how the S$ will change.
• If MAS decides to increase the domestic interest rate by reducing money supply through an open market sale, domestic interest rates would rise above world interest rate and this would lead to short term capital inflows (‘hot money’) due to higher returns on Singapore assets. As a result, there would be an increase in liquidity in Singapore’s financial markets and hence an increase in domestic money supply. This would lead to a fall in interest rate until it becomes on par with the world interest rate again. Hence, Singapore government has no control over domestic money supply and interest rate. (it is also acceptable if the given explanation is based on impossible trinity)
• Explain that there are causes of inflation which cannot be controlled by managing a regime of interest rates. For example, the increase in structural rigidities leading to higher general price level as a result of the Singapore’s government policy on foreign manpower. From 2010, there has been a gradual increase in foreign workers levy particularly for low skilled foreign workers across all sectors in the Singapore economy. The change in foreign manpower policy aimed to reduce the rapid growth and reliance on foreign workers . The higher levy imposed increases firms’ higher cost of production and if the higher cost is passed on as higher prices for these firms’ output , the is leads to a rise in the general price level and higher cost of living for Singaporeans.
• To mitigate the negative effects of this government induced policy on foreign manpower, supply side policies can be implemented to help firms’ rising cost of production through

(1) subsidies to firms and employees to encourage retraining participation rate under the Continuing and Education Training scheme (CET) -> increase the labour productivity retraining to equip them with the necessary knowledge and skills (2) subsidies / tax incentives to firms to encourage invest in capital so to increase capital productivity eg. tapping government funded schemes – Productivity and Innovation Credit scheme introduced in 2010 -> improvement in quantity and quality of both labour and capital resources -> increase productive capacity of the economy -> potential economic growth.
Conclusion/ Evaluation :

• Singapore’s characteristics of a small economy with a lack of scarce resources and openness to trade and capital flows underscores the importance in maintain a regime of managing exchange rate so as to influence the prices of imports and exports and hence control of imported inflation, the main cause of inflation in Singapore.
• Although arguably a regime of managing interest rates can control for inflation caused in recent years by domestic factors, its impact is limited for the rise in housing prices is driven by the demand from speculative buyers. These speculative buyers are unlikely to be affected by changes in interest rates for they are ready buyers with access to cash.
• There are other domestic causes contributing to the rising inflation rate in which a regime in managing interest rates has little impact. Instead other alternative policies will be more appropriate to address the root cause of these domestic factors.
• The view to switch from a regime of managing exchange rates to a regime of managing interest rates is therefore not valid. Singapore must continue maintaining with the regime of managing exchange rates to control for imported inflation, adapting and complementing with alternative appropriate policies to control for other causes of inflation.

Mark Scheme

• Government aims to achieve the following 4 macroeconomic goals: High and sustainable economic growth, low inflation (price stability), low unemployment and healthy balance of payments.
• Possible conflicts may arise in achieving the 4 macroeconomic aims.

Body:

• Low inflation vs actual growth/low unemployment

• An increase in AD will lead to a multiple increase in real national income by the full multiplier process if the real national income increases at the Keynesian range where there is a lot of spare capacity. However, if the economy is nearing full employment, real national income may not increase by the full multiplier, as there is an increase in general price level. Nevertheless, an increase in real national income indicates that there is an increase in actual growth in the economy.
• Conflict arises when the economy aims to achieve low inflation and actual growth/unemployment. As AD increase close to full employment, real national income increases, achieving actual growth and low unemployment, and yet the trade off is that general price level increases as AD increases close to full employment level, causing demand pull inflation. Demand pull inflation occurs due to the existence of bottlenecks as the economy moves closer to the full employment as those sectors experiencing near-full capacity will find their unit costs rising, and therefore prices charged for their commodities will rise. GPL will therefore increase as real output increases. Hence, this explains for the conflict in achieving low inflation and actual growth/low unemployment.

2. Economic growth vs low structural unemployment

• Economic growth involves changes in production both in terms of the goods produced, and techniques used and the skills required. Hence the more rapid the rate of growth, the more rapid the rate of change in production techniques. People may then find their skills are no longer relevant or their jobs may be replaced by machines. Workers may thus find themselves unemployed as their skills do not match the available jobs. For instance, when the economy engages in new technology such as invention of new techniques of production, these new machines increases the productive capacity and LRAS of the economy, achieving economic growth. Yet at the same time, workers may not have the relevant skills to operate these new machines and technology, resulting in them being unemployed. Thus there is a mismatch of skills and opportunities as economic growth brings about a change in the structure of the economy, causing the conflict in achieving economic growth and low unemployment.

• Economic growth vs healthy balance of payments

• Economic growth may cause a BOP current account deficit, if the investment undertaken to achieve growth involves purchasing imported machinery. Furthermore, the rising incomes due to economic growth may lead to increased purchases by households on imported consumer goods, given a relatively high marginal propensity to import. This will worsen the BOT and current account, hence BOP worsens.

• Low inflation vs healthy balance of payments

• The use of exchange rate policy i.e. currency depreciation to improve balance of trade (if Marshall-Lerner condition holds) can lead to demand-pull inflation and cost-push inflation. Depreciation decreases the price of exports in foreign currency and increases the price of imports in home currency. Given Marshall-Learner condition holds, |PEDx + PEDm| > 1, depreciation will increase net exports and improve BOT. The increase in net export can lead to demand-pull inflation if AD increases close to or at full employment level. Also, if the economy is open and import-reliant, depreciation will increase the cost of imported raw materials and decrease SRAS, resulting in cost-push inflation.
• This explains for the possible conflict in achieving low inflation and healthy BOP.

Conclusion: In aiming to achieve the 4 macroeconomic objectives, government is likely to face the possible conflicts: low inflation vs actual growth/low unemployment, economic growth vs low structural unemployment, economic growth vs healthy BOP and low inflation vs healthy BOP. Hence, there is a need for government to implement the relevant macroeconomic policies to help achieve the macroeconomic objectives.

• Identify the following 4 macroeconomic objectives: High and sustainable economic growth, low inflation (price stability), low unemployment and healthy balance of payments
• The initiative of encouraging older residents and working-age women to join the labour force increases the quantity of labour in Singapore which is an aggregate supply management policy to increase the aggregate supply in the short run and long run, through reducing production cost and increasing productive capacity of the economy.

Body: Thesis: The initiative of encouraging older residents and working-age women to join the labour force is effective to help Singapore achieve its macroeconomic objectives
Explain how increase in quantity of labour will achieve macroeconomic objectives in Singapore.

• Economic growth, low unemployment and low inflation

• The long run aggregate supply is determined by the quantity and productivity of factor inputs including labour. Given the initiative of encouraging older residents and working-age women to join the labour force, quantity of labour will increase, leading to an increase in the long run aggregate supply of Singapore and full employment output. Hence potential growth increases.
• The increase in labour supply will also bring about a fall in wage costs, decreasing the cost of production in producing every unit of output. Hence aggregate supply curve shifts downwards and to the right. Real output increase, achieving actual growth and lower cyclical unemployment rate. In addition, general price level decreases, curbing cost-push inflation in the economy.

• Healthy BOP

• Increase in the labour supply leads to a fall in cost of production and increases export competitiveness since exports will be relatively cheaper than imports. This leads to a rise in the quantity demanded for exports and a fall in the demand for imports, this is especially so if demand of exports is relatively price-elastic (e.g. countries such as Korea produce close substitutes for Singapore’s exports of consumer electronics), as such a more than proportionate increase in quantity demanded of exports leads to an increase in export revenue. Hence Singapore’s balance of trade and the balance of payments improves.
• At the same time, the increase in labour supply and lower wage costs can attract more foreign direct investment to Singapore, improving the financial and capital account and hence BOP improves.

Anti-Thesis: The initiative of encouraging older residents and working-age women to join the labour force is not effective to help Singapore achieve its macroeconomic objectives Explain how increase in quantity of labour may not achieve macroeconomic objectives in Singapore.

• Economic growth

Actual growth:

• Although the increase in quantity of labour can increase LRAS and potential growth of the economy, actual growth may not occur since achieving full employment level of national income requires that AD is sufficiently high to buy the potential output. However, the level of AD depends on many factors, including business and consumer confidence. A policy focusing on increasing quantity of labour cannot effectively counter such fluctuations in AD because such a policy is a long term supply-side policy aimed primarily at shifting the AS.
• Evaluation (Alternative way): The government needs to adopt additional stimulus to boost AD i.e. expansionary fiscal policy and depreciation of domestic currency.

Potential growth:

• While increasing quantity of labour is a desirable and necessary growth direction for Singapore in view of intensified global competition, there are many problems in increasing quantity of labour force. Singapore being a developed country with mainly highly skilled labour and capital intensive industries will demand more highly skilled labour to work in the high-technology industries such as biomedical, pharmaceutical and aerospace. As such, encouraging older residents and working-age women to join the labour force may not be effective in allowing them to work efficiently in the capital intensive and high-technology industries, since they may lack the set of relevant skills required in these industries. As a result, AS may not increase as much since quantity of labour is not the sole factor in determining AS, rather quality of labour is important to increase productive capacity. If the older residents and working-age women are not equipped with the relevant skills, they will still be underemployed.
• Evaluation (Alternative way): In order to increase potential growth in Singapore, it is important to increase the skills of the labour force. Singapore government can provide the older residents and working-age women with training so that they acquire the essential skills to work in these expanding industries. Nevertheless, training takes time and it is also a costly investment and a heavy drain on government finances. The outcome is uncertain depending not only on the workers’ receptiveness but also the quality of training.

• Low unemployment

• Although the increase in quantity of labour can increase LRAS and potential growth of the economy, actual growth may not occur since achieving full employment level of national income requires that AD is sufficiently high to buy the potential output (mentioned under the anti-thesis point on economic growth). If growth of AD does not keep pace with potential growth, cyclical unemployment rate will rise.
• Furthermore, there is a possibility of a mismatch of skills between the old residents/ working-age women and the jobs available (i.e. jobs that demand skills to work in the high-technology industries such as biomedical, pharmaceutical and aerospace) in the market, giving rise to structural unemployment. Structural unemployment is evident as Singapore undergoes changes in the structure of the economy.
• As Singapore moves from a labour intensive industry to a capital intensive industry, industrial innovations and new techniques to produce goods and services are emphasized, hence hiring surplus workers raise costs and can hasten the decline of an industry that is threatened by competitive products. An industry that is declining due to economic changes becomes an increasingly large burden to the government which may find itself withdrawing its support to encourage old residents and working-age women to join the labour force.

• Low inflation

Demand-pull inflation

• If Singapore is currently experiencing demand pull inflation, the initiative of encouraging old residents/working-age women to join the workforce may not be sufficient to improve the situation if the increase in AS is not quick enough to counter the effect of an increase in GPL brought about by the increase in AD close to or at full employment. For instance, world economic recovery can lead to an increase investment due to investors’ optimism on the economy, resulting in an increase in AD and cause Singapore to experience demand-pull inflation. Given this situation, an increase in labour supply will not be appropriate in curbing demand-pull inflation, and help Singapore achieve low inflation rate.
• Evaluation (Alternative way): Hence, there is a need to use contractionary AD management policies to tackle demand pull inflation to achieve low inflation.

Cost Push Inflation

• Encouraging old residents and working-age women to join the workforce increases the labour supply and decreases the wage costs. Curbing cost-push inflation is appropriate in the given economic conditions in Singapore as there are cost-push inflationary pressures. However, the cause of Singapore’s cost-push inflation is mainly due to import price-push inflation, given that a large proportion of Singapore’s imports are raw materials since Singapore’s resources are scarce. An increase in the cost of imported inputs due to inflation in foreign countries leads to a fall in Singapore’s SRAS and an increase in the general price level. Hence, decreasing wage costs via increasing labour supply will not tackle the root cause of Singapore’ cost-push inflation problem.
• Evaluation (Alternative way): As such, it is important for Singapore to appreciate its domestic currency so that imported necessities become cheaper in terms of domestic currency, this would also lower GPL as price of final goods & services are lower, leading to lower imported inflation.

• Define Free Trade Agreements: A Free Trade Agreement is a legally binding agreement between 2 or more countries that agree to remove some trade barriers between the signatories.
• Provide example/s of Free Trade Agreements (NAFTA, ASEAN)
• Define unemployment and income inequality
• Unemployment refers to the number of people of the legal age who are willing to and are able to work but are unable to find suitable employment.
• Income Inequality: Differences in terms of income distribution within the population

Body Explain the effects of signings of FTAs

• FTAs will affect trade patterns of a country, allowing trade volumes to increase where the country will now specialise in the production of goods which it has a comparative advantage in.
• Define and Explain the Theory of Comparative Advantage: A country has a comparative advantage over another country in the production of a good if it can produce it at a lower opportunity cost, i.e. it has to forgo less of other goods in order to produce it.
• For developed countries such as the USA, they tend to be relatively well-endowed with capital and thus have a comparative advantage in capital-intensive industries and will specialise in these industries (e.g. car manufacturing).
• FTAs increase the pace of specialisation and globalisation and may result in the collapse of domestic industries that might not be able to compete with the influx of imports, in industries where the country does not have a comparative advantage in. On the other hand, exports might not rise compared to the rise in imports due to the lower level of national income in other signatories, such as Mexico that are developing countries.
• Net exports may fall as a result of the influx of imports being greater than the increase in exports ïƒ lead to deficiency of effective demand (fall in aggregate demand).
• FTAs (with lower tariffs and removal of restrictions on FDI) will foster an increase in overseas FDI and offshoring, which will result in hollowing out of domestic industries, especially manufacturing and in industries that the country does not have a comparative advantage in (e.g. clothes industry).

Effects on unemployment Cyclical unemployment

• Due to deficiency of effective demand (with a fall in AD), there will be a fall in national income. Since labour is a factor of production and is a derived demand for goods and services, there will be an increase in unemployed labour.

Structural unemployment

• Possibility of collapse of domestic industries that might not be able to compete with the influx of imports, especially in industries (senile industries) where the country does not have a comparative advantage in.
• Structural unemployment as workers does not have the necessary skills to transit to new industries. (Mismatch of industries and skills of workers). This is especially so with the transfer of knowledge and skills between countries that might easily render workers’ existing skills easily obsolete and make it difficult for the workers to find new employment.
• For example, with the signing of NAFTA, the US lost many manufacturing jobs (esp. textile) to Mexico, which has a relative comparative advantage in labour-intensive industries.

Effects on Income Inequality

• Income inequality might be exacerbated within a country as workers and factor owners of industries with comparative advantage (e.g. capital-intensive industries) in the country will be able to increase their factor incomes at the expense of workers and factor owners of industries (e.g. labour-intensive industries) that do not have the comparative advantage.
• This is especially so if workers in the disadvantaged industries are not able to transit into new industries and suffer from structural unemployment as a result. This is especially difficult for workers in developed countries, especially as the new emerging industries (sunrise industries) tend to be capital and knowledge-intensive, which will be difficult for the workers to make the transition.

Conclusion The signing of FTAs, such as NAFTA, which increases the pace of globalisation, will have detrimental effects on unemployment, cyclical and structural unemployment, as well as on income inequality that are difficult to eradicate.

• Protectionism, through the enactment of barriers to free trade will reduce the amount of imports that a country imports
• This can be carried out through measures such as the use of tariffs and import quotas.
• For example, tariffs, a tax levied on imports will increase the price of imports and reduce the quantity demanded for imports.
• Illustrate using a diagram
• This will result in a net increase in net exports (X-M) and thus increasing AD and national output and reduces cyclical unemployment
• Protectionism, with the protection of domestic industries (senile industries) will also reduce the extent of structural unemployment that may happen as a result of the signing of FTAs, through the slowing of adoption of new technologies and the reduction in foreign competition in the domestic market.
• This will also reduce the extent of income inequality that is a result of income losses from factor owners and workers from comparatively disadvantaged industries (though at the expense of slower/negative income growth for the industries with comparative advantage).
• Protectionism can be particularly useful for a developed country who has a huge domestic market and do not have a comparative advantage in labour-intensive industries (which hires a lot of labour), where protectionism may prevent a huge fall in employment (especially structural unemployment) and a subsequent rise in income inequality.

Anti-Thesis: Protectionism is not the best solution for tackling unemployment and income inequality
Examine limitations of Protectionism

• Problem of inefficiency on society
• Protectionism is a beggar-thy-neighbour policy that benefits the home country at the expense of the trading partners becoming worse off. If incomes of trading partners fall because of a fall in their export revenue, then they in turn would import less, affecting the first country which erected trade barriers.
• Developed countries generally have more FTAs signed and it is difficult to pursue protectionism without breaking the provisions in the FTAs and this may also invite possible retaliation by trading partners.
• Protectionism is a temporary solution that does not deal with the underlying root causes of unemployment and income inequality arising from factors such as loss of export competitiveness due to increasing pace of globalisation.
• The problem of unemployment may also worsen with the fall in export competitiveness of our exports due to the lack of competition and incentives to innovate will also lead to the eventual fall in exports (X) and a fall in investor confidence (I), leading to a fall in net export revenue and investment that will reduce actual economic growth and cause an increase in cyclical unemployment as a result of the fall in demand for factors of production.
• The decrease in income inequality will be achieved but at the expense of making everyone poorer through a fall in actual economic growth.
• This is in contrast with the use of trade liberalisation policies to encourage free trade and make the country a more popular place for investment, where this will result in economic growth, albeit at the expense of income inequality.

Other policies that tackle unemployment and income inequality
Examine the policy options available to a developed country (Examine any 2 from below)

• Exchange Rate Policy
• Fiscal Policy/Monetary Policy
• Supply-Side Policy
• Income Redistribution Policy
• Synthesis/Conclusion Possible synthesis: Given the severity of unemployment and income inequality, a policy mix is needed. Comparing between the policies, it is unlikely that protectionism is the best policy considering the inability of the policy to deal with the underlying root causes of unemployment and income inequality brought about by globalisation and increasing competition from trading partners. Protectionism and the use of income redistribution policies offers only a temporary “breathing space” for other policies such as supply-side policy to be implemented, which are better able to deal with the root causes. Synthesis should consider the nature of developed countries when evaluating the different policies and coming to a stand on the best policy to be adopted.