No easy way to distribute COEs fairly and cheaply: SM Lee Hsien Loong

COE Allocation: A Deep Dive

Key Concepts:

• COE (Certificate of Entitlement): A permit to own a vehicle in Singapore.
• Scarce Resource: Road space, with COE as a proxy.
• Fair and Efficient Allocation: Distributing COE's in a way that reflects market value.
• Market Clearing Price: The price at which supply equals demand.
• Price Discovery Mechanism: The process of determining the market clearing price.
• COE Tender System: Singapore's system for allocating COE's.
• Pay-as-you-bid: A bidding system where each bidder pays the amount they bid.
• Raffle System: Allocating COE's randomly to applicants.

1. The Challenge of Fair COE Allocation

• The speaker addresses the numerous appeals for preferential treatment in COE allocation, particularly for families and individuals with specific needs (e.g., large families, disabled family members, job requirements).
• The core problem is the complexity of designing a system that accounts for all these individual circumstances. The speaker argues that attempting to create such a system would likely fail due to its inherent complexity.
• The fundamental issue is the allocation of a scarce resource (road space) using economic principles.

2. Economic Principles and Scarce Resources

• Road Space as a Scarce Resource: The COE system is essentially a mechanism for rationing road space. The number of COE's available is limited, reflecting the limited capacity of Singapore's roads.
• Fair and Efficient Allocation: The goal is to distribute COE's in a way that is both fair and efficient. This means setting a price that reflects the true market value of the COE.
• Market Clearing Price: The ideal price is the "market clearing price," where the number of COE's available equals the number of buyers willing to pay that price. This ensures that those who value the COE the most are the ones who acquire it.

3. The COE Tender System as a Price Discovery Mechanism

• Price Discovery: The COE tender system serves as a "price discovery mechanism," similar to how financial markets determine the price of shares or bonds.
• Tender Process: The system involves bidders submitting bids for COE's. The clearing price is the lowest successful bid, and all successful bidders pay this price.
• Evolution Towards Pay-As-You-Bid: The speaker argues that the current online system has evolved to resemble a "pay-as-you-bid" system. Because bidders can see the current clearing price in real-time, they can adjust their bids accordingly.
• Bidding Behavior: Typically, bidding activity is low until the final half-hour before the tender closes, when the "real money comes in" and the price rises rapidly. This allows bidders to make informed decisions based on the prevailing market conditions.

4. Addressing High COE Prices

• Market Clearing Price and Supply: The speaker emphasizes that for a given number of COE's, there is only one market clearing price. If the goal is to lower COE prices, the only solution is to increase the supply of COE's.
• Government Intervention: The government is currently increasing the supply of COE's by drawing from future allocations (5-10% increase). This is intended to moderate prices.

5. Alternative Allocation Methods and Their Drawbacks

• Raffle System: Some cities have resorted to a raffle system, where anyone can apply for a COE at a nominal price. However, the speaker argues that this is not a suitable solution for Singapore.
• Drawbacks of Raffle System: A raffle system does not allocate COE's to those who value them the most, and it can lead to inefficiencies and inequities.

6. Conclusion

• The speaker concludes that the current COE tender system, while not perfect, is a relatively effective mechanism for allocating a scarce resource in a fair and efficient manner.
• While there are calls for preferential treatment for certain groups, designing a system that accommodates all individual circumstances is impractical.
• The key to managing COE prices is to adjust the supply of COE's to meet demand.