“My friends from other countries are often shocked at how much we have to pay to own a car. Before buying a car, we have to bid for the right to own a car via COE through a monthly auction where prices fluctuate depending on demand and supply.”
“Eh, Sing. I think these people are so kiasu that they want to maximise every dollar they spent on the car. They want to make every dollar worth the while,” said Teng.
“You are absolutely right. As a taxi driver, you would probably realise this already. Let me explain my colleagues’ research,” as Professor Sing continued.
[I]ncreasing car prices had the unintended consequences of stimulating driving among people who had bought the cars.
“We would have thought that to tackle traffic congestion, we should make car ownership costly. But my colleagues found that increasing car prices had the unintended consequences of stimulating driving among people who had bought the cars. In other words, as Teng said, car buyers reasoned that as they had already paid so much for a car, they should get maximum use out of it!
“So let’s say it’s you, Teng. You bought a car and it costs about $100,000 all in, including COE. You have already invested a lot into the car. And on top of that, the investment cannot be easily reversed. It’s not like stocks where you can sell the investment quite easily. So what would you do?”
“Drive more?” replied Teng with some hesitance.
“Exactly. You’d drive more. You would mentally justify the high cost by using the car more. Instead of easing congestion, a high COE adds to the congestion by having the unintended effect of encouraging people to drive more.”
“I think I understand why people think that way. I’d probably feel the same way too,” agreed Teng. “It’s being kiasu.”
“While that might be the case, my colleagues also found that this kind of thinking is not permanent. It changes over time. What this means is that people do not always think they should use their car so much. For the first 48 months of car ownership, usage is high to compensate for the initial high purchase price. Then as the car ages, usage gradually decreases. But the higher the initial cost, the longer this will take,” Professor Sing elaborated further.
Everyone nodded.
“My colleagues even worked out how many extra kilometres this phenomenon added to Singapore’s roads,” said Professor Sing, while trying to recall the numbers.
“During the time when they studied COEs, the number of COEs had been reduced from something like 10,000 to 6,500. This reduction resulted in more than a doubling of COE prices from $11,000 to over $24,000. So let me ask you. On average, for each month, how many more kilometres do you think people will drive their cars given the increase in COEs?”
Ah Kong who was listening attentively was the first to respond.
“300 kilometres! 10 kilometres more each day.”
“You crazy ah! Singapore is only 50 kilometres wide from East to West, and 27 kilometres from North to South. Do you know how much is 300 kilometres?” Ah Mah scolded her husband. She sometimes thinks that Ah Kong doesn’t think through before he talks.
Only Ah Mah can speak like that to Ah Kong. Everyone else in the family knows too well they should be polite to the patriach.
“How long is our coastline? Teng, quickly Google for the information,” urged Ah Mah.
“193 kilometres” was Teng’s response after a quick search on his smartphone. He was surprised that his mother even knew about Google. He wondered whether she had learnt it from her grandsons.
“Uncle, 300 kilometres is indeed too high,” replied a very amiable Professor Sing, trying to diffuse the momentarily tense moment.
“Eh . . . Maybe 100 kilometres more?” said Siew Ling.
“Almost,” said Professor Sing. “My colleagues found car owners would drive their cars 86 kilometres more per month than they would have otherwise. That’s 5.6 percent more than their average driving distance.”
“Hmm . . . I get it. They want to max out given the high price they have paid for their car since they’ve already paid for it and are stuck with it,” nodded Siew Ling.
“That’s right. It’s a sunk cost,” explained Professor Sing.
[I]n business, sunk costs are not considered in future business decisions because the cost will be the same regardless of the outcome of a decision.
Seeing the confused look on everyone’s face when he mentioned sunk cost, he continued. “A sunk cost is a cost that has already been incurred and cannot be recovered. So in business, sunk costs are not considered in future business decisions because the cost will be the same regardless of the outcome of a decision.”
“I wonder whether the same thing would be true too for the casino levy. You know, the government increased the levy for Singaporeans from $100 to $150. Do you think once someone pays the levy and enters the casino, he will spend as long as he can there?” asked Teng.
“That’s an interesting question,” smiled Professor Sing. “According to the reasoning given by my colleagues, the answer would be a ‘Yes’. If you’ve already paid a levy to play in a casino and you start losing, you are more likely to stick with it as you’ve already invested in the levy and believe it will be a waste to walk away, even though staying may mean spending more.”
“So fascinating. Is there a special name to call this phenomenon?” asked Teng.
“Ah yes. It’s called the ‘Concorde Fallacy’. Do you remember the supersonic aircraft called Concorde that flew between London and New York? It’s named after that plane,” answered Professor Sing.
“Concorde was a very expensive plane. Well, even after it became clear that there was no economic justification to run Concorde, the British and French governments continued to fund the joint development. Maybe it’s the emotional attachment to what they’ve already invested in – time, money and reputation, or whatever.
”Hey sorry. I would like to stay on but I can’t. I’m tired but I need to prepare for tomorrow’s lecture.”
“Thanks so much for the Kit Kat, Sing. Thanks for the explanation too,” said Teng as he closed the door.
“It’s quite interesting isn’t it to know that people’s behaviour changes because of the amount spent on buying a car?” remarked Siew Ling.
As the family sat down together again at the dining table, the conversation on car usage continued.
“I know Singapore wants to avoid massive traffic jams by limiting the number of cars on the road. And to do that, the government has kept car ownership cost prohibitively high. But those who can afford a car will not want to leave their car at home. Otherwise, it will seem to be a waste of the huge money spent on buying the car. Maybe the government should think of other ways to curb congestion,” said Siew Ling.
At this point, Teng paused for a moment. He recalled something that his taxi friends had said.
“I remember my friends saying that the government realised it too – that relying on high car ownership costs to manage congestion may not be effective. So there’s some talk about shifting the tax from car ownership to usage rate instead.”
“When will this start?” Siew Ling asked.
“Some say 2021, but who knows. It seems that a new sophisticated road-pricing system will be implemented. They refer to it as ERP 2.0 or Electronic Road Pricing 2.0. I spoke to this young man the other day. He’s a research assistant at NUS and he gave me some updates. It will use GPS to determine the amount drivers pay based on distance, time, location and vehicle type. Drivers will receive real-time information