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The theory of public goods provides little insight into the provision of infrastructure in developing countries. Discuss with reference to Singapore and another country of your choice.
INTRODUCTION
In a mixed economy most resources are used in the production of goods and services by the private sector. The portion of production undertaken by the government are classified as social goods. These are for the benefit of the society through which private sectors fail to provide adequately.
Many a times, allocating social goods encompasses the pursuit of interests that prevent the attainment of economic efficiency. The establishment of public choice is hence a necessity in a society’s resource allocation through government’s political decisions rather than individual agreements in private markets.
Social goods involve ownership and or control
by the society due to a lack of an efficient market which requires a market
demand curve which reflects the willingness to pay of all members of society
who benefit from the good and a market supply curve of that good which
includes all opportunity costs imposed on society for its production. As
both conditions are not fulfilled, government intervention is imminent.
The Theory of Public Goods
I) The Theory of Market Failure
The incentives for profit making induces private agents into a market economy to provide private goods. However, such agents are not induced to provide the public goods that are in demand because even when transaction costs are not an obstacle, there is no way to induce individual users to pay for a portion of the good so that the total amount of the good is paid for. Private market can produce goods with nonrival benefits when exclusion is possible.
The government does not always succeed in correcting
market failures. The wisest course of action and the preferences of the
politicians are not always clear. The role of the government is to provide
public goods only through a collective action but benefits all of the public
regardless of their contribution to the cause. Individual users cannot
be made to pay for them. Government – the public sector – thus finances
the production of its public goods through taxes.
II) Definition of Public Goods
There exist 2 determinants to determine the production
of public goods, that is when the market price fail to reflect either the
willingness to pay, opportunity costs or both.
a) Non-Exclusion principle
It refers to the provision of a good to all, including those who do not pay, hence a good’s benefits are not confined to selected persons. Certain goods like law enforcement, parks, street lamps, bridges and defense has a high cost of excluding nonpayers. Henceforth it is infeasible for private markets to produce the goods with an allocative efficiently in the market.
Public goods are non-excludable. The marginal
cost of a public good is the opportunity cost of using resources to produce
that good rather than others. These goods will be undersupplied by a market
when consumers cannot be excluded from sharing in its benefits.
b) The Principle of Rival Consumption
The principle states that the use of a good by
one person prevents another from receiving the benefits.
Public goods are non-rivalry in consumption, inferring that consumption by one person need not diminish the quantity consumed by others. It benefits all consumers with a simultaneous consumption of a good by many persons. A good is non-rival in consumption if its benefits can be made available to one more user at no extra cost. E.g. traffic lights.
Due to the non-rival nature of the benefits of a public good, its marginal benefits differ from that of a private good.
In general, markets fail to allocate resources efficiently if goods are not subject to the exclusion principle, if they are non-rival in consumption, or if both conditions hold.
c) The Public Goods argument
The role of the government is to provide public
goods and they will only be produced by collective action but benefits
people regardless of whether they join in the collective effort. Hence,
individual users cannot be made to pay for them.
d) The Nature of Public Goods
Individuals usually cannot get exactly their money’s
worth of exactly the public goods he wants. As a result, self-interested
people are motivated to take advantage of that awkward inefficiency by
trying to pay as little tax as they can, while grabbing as many public
goods as they can.
The above behaviour will give rise to three inefficiencies,
namely :
1. Most people will not succeed in getting exactly the public goods which they want, and which they would be willing to pay for, if the goods could only be obtained as market goods.
2. There are opportunities for plunders as some get more than their tax-paid shares of public goods and others get less.
3. People are motivated to understate their wants,
when asked how much public goods they individually want to pay for (i.e.
what tax they are willing to pay) each hoping to get the goods they want
at less than cost, i.e. at other taxpayers’ expense.
e) The Free-Rider Problem
This is the tendency of people to avoid paying for a good’s benefits when the benefits can be obtained free. If the good is non-exclusive, an individual may feel that sufficient other people will cooperate to produce the good without his participation. A good would only be produced if there were enough persons agreeing to pay for it. This problem hinders the ability of the private market to cater differently to the demand for a public good. It is inevitable especially in a large population size.
A substantial amount of assurance is needed before
a person feels secure that his own contribution will not be wasted on a
cause. As voluntary contribution by public is not a compulsory act, the
process becomes paternalistic – lacking cooperation. The solution to such
a problem would be the injection of government intervention with appropriate
policies. The government has the power to finance the efficient output
from tax revenues but much of it actually depends on how the political
forces determine public policy. However, people have no incentive to reveal
their demands for the public good, especially if they will be taxed commensurate
to the benefits they report receiving.
f) The Prisoner’s Dilemma
This problem makes it impossible for the public to deny usage of some public goods to those who did not voluntarily pay their share of the costs of government, and taxation is accordingly necessary.
The cost of producing such goods relative to the
benefits derived by any one individual is often so high that people have
neither the incentive nor the means to produce them individually. Thus
the production of public goods is often impossible without a cost sharing
arrangement.
g) Merit goods
Besides public goods, merit goods are provided
by government because of its intrinsic worth e.g. transportation, health,
education…etc. Like public goods, they are characterized by zero or relatively
low marginal costs, spillover effects, or a combination of both and are
subjected to the exclusion principle.
INFRASTRUCTURE DEVELOPMENT FROM A DEVELOPING COUNTRY INTO A DEVELOPED NATION - CASE STUDY OF HONG KONG IN COMPARISON WITH SINGAPORE
Infrastructure is defined as the sectors which provide utilities, transport, telecommunications, etc. to a nation for its economic and social development. In developing countries, these (hard) physical infrastructures are essential for attracting investors as well as its provision as a self-sufficient nation. Developing countries will attempt to expand and improve on their existing infrastructure in order to enhance economic growth and achieve a higher standard of living for its citizens. The country in study, Hong Kong, has come a long way from its status as a developing country to its recognition as a developed nation. It has managed to complete the construction of the famous MTR (Mass Transit Railway) and various container terminals, lengthened the airport runway and switched its source of power retrieval from oil to coal.
During the developing process, Hong Kong was able
to draw funds from international bodies but has lost that privilege due
to its upgrade in status to a Developed Nation.
The Theory of Public Goods on the Provision of Infrastructure
The economic philosophy of the Hong Kong Government is said to be that of free enterprise and free trade. One consequence of this philosophy is that the Government is said to restrict itself to the provision of infrastructural facilities either directly or indirectly through cooperation with public utilities and autonomous organisations.
There are enterprises in Hong Kong that can be described as natural monopolies. Such enterprises, when run privately, would gravitate towards monopolistic or oligopolistic market forms. Some enterprises are public organisations which may have to intrude into citizen’s rights when it comes to constructing and implementing policies on gas supply, telephone services, railways, electricity supplies, waterworks and sewage. These are all examples of natural monopolies. These enterprises would require government’s backing to get the citizens to cooperate with them.
There are twelve concessionary companies in Hong Kong; China Light and Power Company, China Motorbus Company, Hong Kong and China Gas Company, The Cross-Harbour Company, Hong Kong and Yaumati Ferry Company, Hong Kong Electric Company, Hong Kong Telephone Company, Hong Kong Tramways Limited, Kowloon Motor Bus Company, Peak Tramways Limited, “ Star “Ferry Company, Cable and Wireless Limited and Television Broadcast Limited.
Such monopolies of public goods come under different schemes of control and are known as concessionary companies. In exchange for their near-monopoly status, the government imposes the following four restrictions:
1. on the level of dividends paid out to shareholders.
(no uniformity among different organisations);
2. on the cost of services charged to the public,
that is the Government’s approval is required before the Companies impose
fares or other charges onto a general consumer;
3. these Companies must maintain a Development
Fund into which surplus funds are paid for, or in the case of shortfalls,
transfers can be made; and
4. royalties in addition to ordinary taxes must
be paid to the Government (no uniformity of amount).
Most of them operate under franchise with pricing under legislative control. In general, they provide adequate services at reasonable prices, and make good profits.
By any standard, the Hong Kong government has chosen to play a limited role in shaping the goals and strategy of development, or in regulating and supervising the operations of private enterprises. The policy-mix of a small but efficient government, a well-administrated legal system, free enterprise and open economy has been unusually effective in promoting economic growth. By the late 1960s, the overall business climate was so favourable that private capital participated in infrastructure development, and the government could devote its resources to public goods and services. All the preconditions for private enterprises to flourish were in place. Self-sustaining growth was set in motion. Not surprisingly, many observers concluded that the government has had little influence on Hong Kong’s prosperity. But we should not just equate limited action with negligible contribution. Specifically, in cases where a market solution is feasible and effective, or where the government cannot claim comparative advantage over private enterprises, non-intervention is a wise policy choice. It was not necessary for the local government to play an active party during Hong Kong’s industrial drive mainly because the institutional framework, important infrastructures, including apparatus for world trade, and an initial supply of capital to accommodate private enterprise were already in place. In general, such pre-conditions do not exist among developing nations and active government participation will be necessary to provide them.
HK was blessed with a succession of favourable
external circumstances but there were not indispensable for sustained growth.
Importantly, HK managed to achieve satisfactory growth under unfavourable
circumstances. . Under a system of non-intervention and free enterprise,
entrepreneurial activities are the key agents that translate positive pre-conditions
and opportunities into success. And the growth process of HK involved a
large number of entrepreneurs running a myriad of large and small business
in all sectors of the economy. Their number, dedication, business acumen,
and versatility have never failed to impress observers from outside. With
rising affluence, the state did have to face the issue of income inequality,
if social harmony was to endure. To credit, the government managed to strike
the right balance between growth and equity. It chose to redress inequality
by working on the expenditure side, through transfers in kind. The basic
needs of all but a few were provided for; through an extensive public housing
program and a comprehensive education system. Along with rising opportunities,
upward mobility is now a reality for all. This was achieved without raising
the very low tax rates, or incurring public debts. It has, indeed, been
an extraordinary achievement.
Transport
The government invests directly in roads, railways,
subways and airport. Given the high density and unfavourable terrain, it
has done a good job in ascertaining a smooth traffic flow in the urban
area.
a ) Port and Shipping
After the 1997 handover, Hong Kong’s role as an entrepot in Southern China became significant. When it was still a developing nation, the traditional piers and mid stream operations already cannot meet the demands of imports and exports. Hence, efficient container terminals were constructed and privately owned and operated but their developments were planned by the government.
Hence, though it does not belong to the category of public goods, it is an essential infrastructure in Hong Kong’s shipping industry and has to be provided in order to expand on its import and export trade.
Victoria Harbour – port administration is the responsibility of the department of Marine but it neither controls nor operates any of the major wharves or warehouses in the port. With the exception of the Hong Kong Macau Ferry Terminal, all terminals are operated by private enterprises. The Kwai Ching Container Terminal’s berths are also operated by private companies.
In Singapore, the port facilities are managed by the Port of Singapore Authority. Like in Hong Kong, these facilities are necessary for the economic growth of Singapore. Singapore’s port has since become the best port in Southeast Asia for several years and with the rapid growth of the port, the government has decided to allow the Port of Singapore Authority to be incorporated.
Hence, in both Hong Kong and Singapore, it can be observed that the port and shipping infrastructures are not a public good and hence the public good theory does not provide any insight into the provision of these infrastructures.
b) Air Transport
Due to the limitations of Kai Tak Airport with its hilly location, proximity to urban areas and size of land, the government plans to replace it with another airport Chek Lap Kok Island off Lantau Island.
The Sino-British Land Commission reached an agreement on arrangements for granting the land required for the new airport at Chek Lap Kok. Further excavation and reclamation of land was also conducted to build the necessary runways for the airport. This project was also given tremendous support by both the People’s Republic of China and United Kingdom governments.
Airport Authority concluded a HK $6.5b syndicated revolving loan involving 20 financial institutions from 11 countries. This public good project has taken up one of the largest syndicated financing loan since 1998.
The Hong Kong Government also advanced HK $36.6b to the Airport Authority which is then converted into equity for the airport’s construction process. A financial support agreement and land grant was also signed between the government and the Authority.
The Provisional Airport Authority also signed an agreement with 11 banks for a syndicated loan facility of HK$8.2b which met a substantial part of the Authority’s projected maximum borrowing requirement of $11.6b to complete the first phase.
Serving a busy 440-460 flights a day, with the highest record of passengers numbering 117,000 in 1999 since opening, it has proven to be a highly functional air transport infrastructure in Hong Kong.
Due to its high cost incurred in the construction period, the HK government was anxious to recoup some of the immense building costs from airport charges, hence, intending to impose high charges by international standards. Air operators have expressed alarm over the competitive challenge that would be generated by high airport charges.
Like in Hong Kong, Singapore’s Changi Airport, is funded by government. It is under the statutory board of Civil Aviation Authority of Singapore (CAAS) and hence since been expanding from Terminal One to Two and Terminal Three is already in the pipeline. CAAS has also constructed the Skytrain to transport passengers from Terminal One to Terminal Two.
Airports, being another important infrastructure
for the economic growth of the country, have been provided by the government.
However, it is not a public good as users are made to pay airport taxes
should they want to travel overseas. In the provision of such infrastructure,
the government fails to exclude the public from using the airport, except
for certain areas restricted to the public such as the check-in gates,
which are only available to air passengers. For example, students used
to crowd around the Viewing Gallery at the Changi Airport to study without
having to pay for the use of the area and the Skytrain is free of charge
and members of the public can just free ride on them without paying a cent.
c) Road Network
Many forms of transportation are available in
Hong Kong, such as single and double-decker buses, 14-seater minibuses,
electric trams, taxis, hirecars and a peak tram service up Victoria Peak.
These are all privately-owned by investors. The same goes for Singapore,
which has transportation like public buses and taxis.
d) MTR ( Mass Transit Railway)
The dense population requires a fast, cheap and efficient way of transport. A quasi-government body was formed to undertake its operations and construction. To fully utilise the MTR system’s capacity, plans have been developed to connect the system with the Kowloon-Canton Railway to serve the populated new towns in the Northern Territories and convert the existing tramway into a modern light railway system. The MTR services about 2 million passengers daily.
Similarly, Singapore has its Mass Rapid Transit (MRT) similar to the MTR of Hong Kong. A quasi-government, MRTC, has also been set up to operate the MRT in Singapore.
However, as users have to pay for the use of the
MRT and the MTR, though at an affordable sum, this infrastructure is not
a public good and hence, its provision is not supported by the public good
theory.
Telecommunications
Telecommunications in Hong Kong are fully automated and they are moving towards the use of cable for all its telecommunication services. The telecommunication infrastructure in Hong Kong is controlled by the Telecommunications Authority (TA), a statutory body, which used to enjoy a monopolistic power in the telecommunication industry of Hong Kong, while Hong Kong Telephone Company (HKTC) monopolised the telephone sector of the industry. Annual investment in Hong Kong’s telecommunication infrastructure is approximately US$1.54 billion. However, in 1993, the Office of the Telecommunications Authority (OFTA) was formed as a separate government department and the government has also decided to liberalise the industry to allow private companies to step in and provide some of the telecommunication services in 1995. These changes ensured competition among the companies and crippling the Telecommunications Authority and the Hong Kong Telephone Company from their monopolistic dominance in the industry. This liberalisation will also lower prices for consumers. Companies involved in the telecommunications in Hong Kong are Cable and Wireless Co. Ltd., Great China Telecom Limited, Hong Kong Telecom, Hong Kong Telecom IMS, PEWC Telecommunications Co. Ltd. and Well Dragon Hong Kong Limited. Telephone services in Hong Kong are provided by the Hong Kong Telephone Company Ltd., a public company with a franchise from the Government. Other private companies stepping into the telecommunication industry in Hong Kong includes Hutchison Communications Ltd., New T&T Hong Kong Ltd., and New World Telephone Ltd.
Current private companies in the telecommunications industry include Wharf Cable Limited (cable company), Satellite Television Asian Region Ltd. (Star TV) (wireless company) and Hong Kong Telecom, New World Telephone, New T&T Limited and Hutchison (telecommunication companies).
Appendix 1 shows the development in telecommunication technology over the years.
In Singapore, the telecommunication infrastructure was originally under the management of Singapore Telecoms, but it has since been corporatised to Singtel. Recently, there were also an influx of private companies, such as Hutchison, M1 and Sunpage, who enter the industry to compete with Singtel for the telecommunication business in Singapore. Singapore is modeling after Hong Kong and is gradually moving into the use of cable in its telecommunication infrastructure.
As users pay for the use of the telecommunication
services in Hong Kong and similarly in Singapore, telecommunication infrastructures
in both countries are not considered as pure public good, though they were
initially provided by the government due to their necessity for the economic
growth of both countries. Moreover, the fact that private companies can
operate and manage their own telecommunication infrastructures have led
to the failure of the theory of public good in explaining the provision
of the telecommunication infrastructure.
Utilities
Though utilities are considered to be pure public
goods that should be provided by the government for the welfare of the
citizens of a country, the high costs of their provision led to the need
to charge consumers based on the amount of consumption. As can be seen
in the following utilities, the Hong Kong government has allowed private
firms to step into the industry to provide such infrastructures while in
Singapore, the statutory board in charge of the utilities have been corporatised,
making it into a profit-making and self-maintained company. Such moves
have made utilities become non-public goods and hence the provision of
utilities infrastructures can no longer be explained by the theory of public
goods.
(a) Gas
The public-listed and investor-owned Hong Kong
and China Gas Company Ltd. has a production capacity of 935,000 cubic metres
of gas daily. The company supplies Towngas to domestic, commercial, and
industrial users in all the urban areas such as Kowloon, the New Territories
and most of the outlying islands of Hong Kong.
(b) Water
Water supply is the responsibility of the Public Works Department. In the absence of rivers and underground sources, Hong Kong is almost entirely dependent for its water on the retention of rain in impounding reservoirs.
To date, Hong Kong has 17 storage reservoirs with a total storage capacity of 67,000 million gallons. The largest two, the Plover Cove and High Island Reservoirs, have a combined capacity of 306 million cubic metres.
In addition to the existing reservoirs, a desalinization plant has been under construction since 1975. The plant, which is the world’s largest, consists of six units capable of providing a total of 182,000 cubic metres of fresh water daily.
Water charges are collected every four months.
They're not generally steep but the Hong Kong Water Authority doesn't waste
any time when it comes to cutting off non-payers. Hence, water provision
in Hong Kong is excludable for those who do not pay, thus preventing free-riders
from making use of the water in Hong Kong.
(c) Energy
Hong Kong relies entirely on imported fuel oil for power generation. It has neither natural resources nor alternative domestic sources for power generation such as geothermal power and coal.
Its electricity is supplied by two large public companies – Hong Kong Electric Holdings Limited and China Light and Power Company – and a small private firm, Cheung Chau Electric Company. Hong Kong Electric supplies power to the islands of Hong Kong, Lamma, and Ap Lei Chau; Chinan Light and Power to Kowloon and the New Territories, including Lantau and a number of outlying islands; and Cheung Chau Electric to Cheung Chau Island.
Two additional power stations have been installed. The Hong Kong Electric has constructed one in Lamma Island to replace its station at Ap Lei. China Light and Power has built another station in Castle Peak.
To minimise the price effects, Hong Kong Electric and China Light and Power plan to purchase coal from China. Hong Kong Electric has a contract with China National Metals and Mineral Import and Export Corporation for the supply of coal. It has also announced that, by the early 1980s, it will generate 60% of its power from coal and that the new generators for the proposed power station on Lamma Island will use either coal or oil.
China Light and Power Company has a monopoly of electricity service in Kowloon and the New Territories and is the larger of the two Hong Kong-based electricity companies. It is closely linked with the Kadoorie family. One of the territory’s leading non-Chinese dynasties. China Light and Power has a stake in the Daya Bay nuclear power plant in South China, just 50 kilometres from Hong Kong, and has in recent years, been an important supplier of power in the Pearl River Delta.
Hong Kong Electric Holdings, Ltd., a member of the Hutchison Whampoa Group, has the electricity monopoly on Hong Kong Island. Hong Kong Electric is currently focusing on power provision in the domestic market and is taking a cautious approach towards the investing in power plants on the Mainland. Its consulting arm, Associated Technical Services Ltd., has clients throughout Asia and in Saudi Arabia and Kuwait.
In Singapore, the provision of utilities, such
as water, gas and electricity used to be under the statutory board, Public
Utilities Board (PUB), which has since corporatised to Singapore Power.
Appendix 2 shows the utilities’ rates payable in Singapore.
CONCLUSION
The list of infrastructures mentioned in this essay is not exhaustive. Other infrastructure in Hong Kong and Singapore will include defence, schools, hospitals, parks, housing and tourism infrastructure such as the new Disneyland in Hong Kong.
As can be seen, both Hong Kong and Singapore are privatising a lot of their statutory boards to make them more self-sufficient. The respective governments have also encouraged more private participation in the provision of several of the countries’ infrastructures. This helps them to reduce the budget of the nations’ funds and provide lower costs to consumers.
Although the infrastructures described in this essay may bring forward the argument that the theory of public goods does indeed provide little insight into the provision of infrastructure in developing countries, since most of the infrastructures are excludable to the public unless they are paid, infrastructure like defence and parks are pure public goods, which allow all the citizens of both Hong Kong and Singapore to have the privilege to enjoy them without having to pay for their use.
Hence, whether the theory provides little insight
to the provision of infrastructure in both Hong Kong and Singapore or not,
will depend on the type of good the infrastructure belongs to. The government
will provide public goods where there are market failures that the market
itself will not be able to solve.
Yap Hui Ing
Yeo Phuay Hua
