How economic sense can aid policymakers

Singapore places a premium on rational thinking, and economics can be a powerful tool to evaluate the best policy options, said Trade and Industry Minister Lim Hng Kiang yesterday.

Citing energy policy as ‘one of the most complex and challenging policy issues in Singapore’, Mr Lim said the country has to balance cost competitiveness and energy security with environmental sustainability.

‘This is where sound economics can help. Well-intentioned but misguided interventions can do more harm than good,’ said Mr Lim, speaking at the third Ministry of Trade and Industry (MTI) Economic Dialogue.

The minister elaborated on three popular fallacies in energy policy that careful economic thinking can help dispel.

The first is that the best way to achieving reduction in carbon emissions is to set regulatory standards. But regulation, such as raising emissions standards of cars or providing subsidies for renewable energy, imposes a ‘shadow price’ which will force costs on consumers and companies.

‘Is this cost worth the benefit… (and) is regulation the most efficient option?’ he asked the 200-strong audience at the event held at the Nanyang Technological University (NTU).

The second fallacy is that regulations give certainty over the amount of carbon reduced. But this does not factor in the ‘rebound effect’, which has found that subsidising energy efficient air-conditioners, for example, encourages consumers to consume even more energy.

‘What is needed is to put a price on carbon… Putting a price on carbon will send a powerful signal throughout the economy to encourage energy efficiency, switch to renewable sources of energy and reduce energy consumption,’ said Mr Lim.

A third fallacy is that there should be a tiered system of pricing electricity. Economic intuition says this is a flawed approach, he added. Setting a lower price for the first block of electricity will only encourage all households - rich and poor - to consume more energy.

A more efficient way to help lower income households is to have a single higher price for electricity and to give them direct cash transfers to offset the impact of the higher price, he said.

Mr Lim stressed that ‘we cannot base our decisions on instinct and gut feel… Our policies must be based on clear objectives and sound evidence’.

To this end, Singapore’s economists are deployed widely across the public sector and work on many policy issues, including international trade, labour, housing and fiscal policies, he said.

Mr Lim yesterday also presented the MTI (Economist Service) Book Prize and the MTI (Economist Service) Best Thesis Prize to the top economics students and the best economics thesis from each of the three universities.

One winning thesis, by NTU students James Lim, Nguyen Phuong Linh and Nguyen My Hanh, found that women exhibit more generous charity-giving behaviour than men and suggested that charitable organisations tailor marketing strategies accordingly.

NTU president Su Guaning said yesterday that the dialogue provided students with an opportunity to gain insights into what public sector economists do.

‘It enables them to better understand the importance of economic thinking in policy-making,’ said Professor Su.

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