Assess whether the Electronic Road Pricing system is the best policy to deal with traffic congestion in Singapore.

The Electronic Road Pricing is a policy designed and implemented by the government in the year 1998, replacing the Area Licensing Scheme, with an aim to control traffic congestion in Singapore. Traffic congestion is an issue in the economy where efficiency is disrupted due to an existence of negative externalities. Negative externalities are external costs incurred by 3rdparties not directly involved in the production or consumption of a good or service, of which these costs are unaccounted for in the free market. These negative externalities cause market failure, which is a situation whereby the free market, in the absence of government intervention, fails to allocate resources efficiently, resulting in societal welfare not being maximised


How congestion causes negative externalities


Traffic Congestion                                             

Figure 32a: Negative Externalities in the Market for Private Transport

Negative externalities are external costs incurred by 3rdparties not directly involved in the production or consumption of a good or service, of which these costs are unaccounted for in the free market.  

Marginal private costs faced by individuals includes cost of petrol and car ownership
Marginal private benefits enjoyed by individuals includes increased comfort
Marginal external costs exist due to negative externalities generated from reduced time available for leisure and work because of being stuck in traffic, increased business costs due to longer transport times and costs as well as increased noise pollution and incidences of accidents. The presence of external costs means that there is a divergence between marginal social costs and marginal private costs. 

With reference to figure 32a, which shows the market for private transport,

  • Free market output would be at Qm where MPC=MPB, since consumers would only consider their own private costs and benefits when choosing to purchase private transport and not the external costs

  • Socially desirable level of output is at Qs where MSC=MSB.

  • Since Qm>Qs, overconsumption of private transport occurs and deadweight loss of area ABC is generated

  • Due to allocative inefficiency, market failure exists in the market for private transport


(RWA)Evaluation of ERP


The merits & demerits of road-pricing as a policy


1.     Road Pricing – (RWA) ERP: in-vehicle units (IUs) are fitted in vehicles and require a cash-card to be inserted.

2.     Road users are charged a fee for using congested roads during peak hours.

3.     A gantry controls the deduction.

4.     The pricing serves as a tax for the use of congested roads èHigher MPC èreducing consumption towards the socially optimal level.

5.     ERP Revisions and improvements (upgrades): satellite information on the severity of congestion – provides information to the government whether to increase, decrease or remain existing charges.

6.     Limitations: the tax still forms a small proportion of the total cost of car ownership and usage in Singapore

7.     Limitations: continual congestion cannot be sustainably solved by addition of more gantries


(RWA) Evaluating alternative policies 


Vehicle Quota System


1.      Additional policy of the government to control the growth of vehicle population in Singapore.

2.      A 0.25% annual vehicle population growth rate is currently allowed under the vehicle quota system.

3.     Car consumers will be required to bid for Certificate of Entitlements (COEs), and the supply of the COE is dependent on the vehicle population growth rate and the number of cars de-registered in each period.

4.      If vehicle population is left unchecked, there will likely be an unrestrained growth in vehicle population which will result in more driving causing increased congestion.

5.      The VQS ensures that the vehicle population in Singapore does not spiral out of control, and therefore helps to ensure that the problem of congestion is managed.

6.     Limitations: the VQS manages the car ownership in the country and has no direct relation to the car usage. Consumption behaviours are unaffected by the VQS. With the high costs of car ownership – motorists commonly exhibit the “buffet syndrome” whereby maximisation of car usage occurs (returns on investment). The VQS hence must be supplemented with the ERP.


(RWA) Improving public transport as a viable substitute to private transport


1.      To make significant improvements in congestion, motorists should be encouraged to give up driving altogether

2.      Since public transport is a substitute to private transport, by improving public transport to make it a more viable substitute to private transport, it will reduce the usage of private vehicles and therefore reducing congestion.

3.      To make public transport a more viable substitute, the government needs to improve both the accessibility (convenience) and reliability of public transport.

4.     An expansion of the existing rail network is work-in-progress and there are plans to ensure that all homes are within walking distance of an MRT station soon. This should make public transport more convenient and convince people to make the change.

5.      Public transport reliability in Singapore should also be improved through a possible government expenditure on maintenance works that seek to reduce the incidence of breakdowns. The Singapore government has introduced the New Rail Financing Framework which entails the purchase of train assets from train providers, effectively taking over the responsibility of maintenance.

6.      A reliable and convenient public transport can then convince more motorists to consume less of private transportation, improving the situation of congestion in Singapore.




Road pricing should be a core policy to tackle traffic congestion but needs to be complemented with Vehicle Quota System. Improving public transport will improve the congestion problem significantly but it is the measure which takes the most resources and effort to carry out.


The ERP is a policy that has been in effect for an extended period and is one to likely stay. While it is still used in the form of gantries, there will be upgrades to one supplemented by real-time satellite information, meaning there would be a better estimation of how much to charge and thus provide better responses to alleviate the negative externalities caused by congestion.