Question 1: Opportunity Cost
The Rental Housing Operations of Hong Kong Housing Authority incurred a deficit of $601 million during 2011/12. 57 This shows that the rental income could not cover relevant expenses on rental housing such as management and maintenance expenses.
(a) What are the explicit costs of the provision of public rental housing by the Hong Kong Housing Authority?
(b) What are the explicit costs of building new public housing estates?
(c) Apart from the type of costs mentioned in (ii), what other resources are needed?
(d) What is the opportunity cost of building new public housing estates?
(e) (i) State one of the public housing estates located in urban area.
(ii) State one of the public housing estates located in Lantau Island.
(iii) How can the opportunity cost be possibly different when public housing estates are built in the locations stated in part (i) and (ii)? (Assume that construction costs are the same and the land is available for sale to private property developers)
(iv) Suppose occupants of all public housing units have to pay the same amount of rent. Considering the concept of opportunity cost, is it true that the government provides the same amount of subsidy to occupants mentioned in (i) and (ii)?
(f) Why has opportunity cost occurred when public housing estates are built?
57 Hong Kong Housing Authority Annual Report 2011/12
Question 2: Resource Allocation and Economic Efficiency I
“Given the present long waiting list for the Public Rental Housing (PRH), the low-income families, elderly and those inadequately housed such as in SDUs first should be accorded priority in allocation. Non-elderly singletons are put in a different waiting list under the Quota and Points System (QPS) currently. If the QPS is removed, the waiting time for families will increase drastically. However, to reduce the waiting time of non-elderly singletons above the age of 35, the QPS should be improved.” said Professor Anthony Cheung Bing Leung, the Secretary for Transport and Housing Bureau.
Hong Kong Daily News 6 Sept 2013
(a) Define shortage.
(b) Draw a supply-and-demand diagram to illustrate the current market situation.
(c) Suppose the allocation of public rental flats accords to households’ valuation of public rental housings, i.e. the ones who value the most could live in the public rental flats. Define consumer surplus AND indicate the corresponding consumer surplus in the diagram of (b).
(d) Comparing the consumer surplus stated in (c), comment on the consumer surplus that would be resulted from the existing allocation method: Applicants would be divided into groups according to family size, applied district or other special situations. Then, they would queue up to wait for the available public rental flats. The ones who applied earlier can get the flat sooner.58
Question 3: Resource Allocation and Economic Efficiency II
“On the non-elderly one-person applicants, we have conducted a desktop analysis on their profile. According to HA’s 2012 Survey on WL Applicants for PRH, in March 2012, there were a total of 87 800 (46% out of a total of 189 500 applicants on the WL) non-elderly one-person applicants under the QPS. Of these 87 800 applicants, 65% (57 200) were aged 35 or below. Within this group, 34% were students when they applied for PRH, 47% of them had post-secondary or above education attainment and 33% were PRH tenants.
However, for those aged above 35, only 7% of them had attained post-secondary or higher education.”
Panel on Housing, Sub-committee on the Long Term Housing Strategy, Measures to Maximize the Rational Use of Public Rental Housing Resources
58 Hong Kong Housing Authority: http://www.housingauthority.gov.hk/tc/common/pdf/about-us/policy-focus/policies-on-public-housing/A01/A01.pdf
(a) Draw a supply-and-demand diagram to illustrate the market of public rental flats according to the following table:
[The quantity supplied is 100 units while the rent is $1,400.]
(Note: each group of households has 50 family units.)
(b) Calculate the consumer surplus, if the public rental flats are allocated to (i) Group A and B households.
(ii) Group A and C households.
(iii) Group A and D households.
(c) If the rent is reduced to $900, what will be the shortage of public rental flats?
(d) If the quantity supplied of the public rental flats is increased to 150 units, while the rent remains at $1,400, what will be the shortage of public rental flats?
Households Marginal benefit of renting public flats ($)
Group A 2,500
Group B 2,000
Group C 1,500
Group D 1,000
Question 4: Demand-and-Supply Model
“It was claimed that, in Hong Kong, over 171000 people are living in substandard, subdivided flats.
The Census and Statistics Department estimated only 64900 last October. It is over 2.6 times of this figure.
Since the researchers could not examine illegal homes in industrial buildings, the figure could be even higher.” said Professor Anthony Cheung Bing Leung, the Secretary for Transport and Housing Bureau.
Hong Kong Daily News 28 May 2013
(a) Why would the short-run supply of subdivided units be relatively elastic comparing to that of public rental flats?
(b) (i) Give TWO reasons to explain why the demand for public rental flats would increase.
(ii) How would the shortage of public rental flats be affected after the demand increases?
(c) (i) Give TWO reasons to explain why the demand for subdivided units would increase.
(ii) How would the equilibrium rent of subdivided units be affected after the demand increases?
Question 5: Externality
The figures below provide information of HK International Airport Development:
Figure 10-34 The Traffic Growth of HK International Airport in 15 Years
Source: HKIA Three-runway Systems59
Figure 10-35 Information about Airport Runway Capacity
Source: HKIA Three-runway Systems60
“The practical capacity of the two-runway system is only 420,000 flight movements. … Under a three-runway system, HKIA will be able to accommodate 620,000 flight movements per year, meeting its demand up to the year 2030.”
Webpage of HK International Airport
(a) Define externality.
(b) What externalities will be brought by the construction of third runway in Hong Kong International Airport?
(c) What are the names of the public housing estate near Hong Kong International Airport?
(d) What externalities will be brought by the construction of third runway in Hong Kong International Airport to the housing estate mentioned in question (c)?
(e) Could the government and residents of the housing estate mentioned above solve the external costs in (d) efficiently?
Question 6: AD-AS Model
“We will increase and expedite the supply of subsidised housing –
i. As a production target, the total supply of PRH will be at least 100 000 units over the five years starting from 2018;
ii. I have asked the Transport and Housing Bureau (THB) to review and expedite the construction of public housing flats without compromising quality, and find ways to simplify technical assessments under different regulatory requirements;
iii. I will invite the HKHS to build more subsidised housing. In view of the very favourable response to the Greenview Villa project, the Government has set aside a site in Sha Tin for the HKHS to develop a similar housing project. Another site in Sha Tau Kok will also be allocated for rental housing development. Together, the two sites will provide about 1 000 units;…”
Paragraph 63, 2013 Policy Address
(a) If the government decides to increase the supply of public rental flats, how will it affect the short-run aggregate demand in Hong Kong?
(b) If the government decides to increase the supply of public housing units, how will it affect the long-run aggregate supply in Hong Kong?
Question 7: Income Inequality
Income inequality is one of the major public issues in Hong Kong. With reference to Gini coefficient, one of the popular indicators of income inequality, Hong Kong Census and Statistics Department provided estimates based on original household income, for year 2001, 2006 and 2011, in the following table61.
Table 10-8 Gini Coefficient Based on Per Capita Monthly Household Income, 2001, 2006 and 2011 (By using Original Household Income)
All domestic households
Year 2001 2006 2011
Gini Coefficient computed by using Original Household
Income
0.525 0.533 0.537
Source: Population Census 2011, Hong Kong Census and Statistics Department
(a) What is Gini coefficient?
(b) What is the implication of an increasing Gini coefficient?
(c) Describe the changes in Gini coefficient, calculated by using original household income, from 2001 to 2011 as given in the Table 7.1. What is the possible implication of such changes?
(d) Is Gini coefficient an accurate measure of income inequality in Hong Kong if the measure is computed by using original household income? Why?
61 Hong Kong 2011 Population Census - Thematic Report : Household Income Distribution in Hong Kong (p.107)
According to the definition provided by the Hong Kong Census and Statistics Department, post-tax post-social transfer household income can be computed as follows62:
Post-tax Post-social transfer Household Income = Original Household Income –
Total Tax Payments + Total Public-funded in-kind Social Benefits
Hong Kong Census and Statistics Department has provided estimates using post-tax post-social transfer household income, for year 2001, 2006 and 2011, in the following table 63.
Table 10-9 Gini Coefficient Based on Per Capita Monthly Household Income, 2001, 2006 and 2011 (By using Post-tax, Post-social Transfer Household Income)
All domestic households
Year 2001 2006 2011
Gini Coefficient computed by using tax Post-social Transfer Household
Income
0.470 0.475 0.475
Source: Population Census 2011, Hong Kong Census and Statistics Department
(e) Describe the changes in Gini coefficient, calculated by using post-tax post-social transfer household income, from 2001 to 2011 as given in the Table 7.2. What is the possible implication of such changes?
(f) Comparing Table 10-1 with Table 10-2, what is the effect of using tax post-social transfer household income on the value of Gini coefficient?
(g) Apart from public housing, list out two examples of publicly funded social benefits in Hong Kong.
(h) What are the possible effects on the value of Gini coefficient if the HKSAR Government decides to increase public housing supply substantially?
(i) Many stakeholders in the society urge HKSAR government to build more public housing. Is it necessary for the government to respond to this urge?
Suggested Answers
Question 1: Opportunity Cost
(a) Explicit costs mainly include maintenance, management, and administration costs.
(b) Explicit costs mainly include construction costs and related administration costs.
(c) Land resources.
(d) Opportunity cost is the highest-valued option forgone when making decisions.
Considering the land used to develop new public housing estates, the highest-valued option could possibly be the land premium paid by property developers.
Otherwise, opportunity cost could also be the benefits brought by building a park or other amenities on the land.
Meanwhile, the opportunity cost of construction expenditure could be the value from spending money in other possible areas of government expenditure (education, healthcare, social welfare, etc) or saving in the fiscal reserve, depending on which choice can bring along the highest value to Hong Kong.
(e) (i) Upper Wong Tai Sin Estate, or other acceptable answers.
(ii) Yat Tung Estate, or other acceptable answers.
(iii) Building public housing estates in the area stated in (i) has a higher opportunity cost.
Land in urban area generally has a higher commercial value. Private developers are willing to pay a higher price to obtain the land, thus, bringing more revenue to the government. As the opportunity cost of building public housing estates is to give up the highest possible revenue in the sale of
(iv) No, the government provides more subsidies for the public housing occupants living in urban area. Public housing estates in urban area have a higher commercial value and they are located conveniently to other facilities. Hence, the occupants in those estates actually receive more subsidies from the government if we take opportunity cost into consideration.
(f) Land resources and the fiscal revenue of government are both scarce and limited in Hong Kong. It indicates that the current resources are not able to satisfy the needs of all stakeholders in society, forcing people to make choices in resource allocation. As a result, opportunity cost exists.
If the government decides to put resources in building public housing estates, the opportunity cost would be the highest value among the forgone opportunities.
One of the typical examples is the recent debates on whether land of country parks should be used for building new public housing estates.
Question 2: Resource Allocation and Economic Efficiency I
(a) Shortage is a situation where the quantity supplied in a market falls short of the quantity demanded at a given price.
(b)
Figure 10-36 Shortage under Limited Supply of Public Rental Housing
Illustrated by the diagram:
1. Supply curve is perfectly inelastic.
2. The rent is set below the equilibrium level.
3. There is a shortage.
(c) Consumer surplus is the value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought.
Figure 10-37 Consumer Surplus under Limited Supply of Public Rental Housing
(d) Under the existing allocation mechanism, the ones who can live in public rental flats may not be those who value the flat the most (i.e. those who could generate the most marginal benefit by living in these public rental flats). Thus, the existing allocation mechanism cannot help maximize consumer surplus effectively, which means the consumer surplus resulted would be smaller than that in (c).
Question 3: Resource Allocation and Economic Efficiency II
(a)
Figure 10-38 Supply and Demand Diagram for Question 3(a)
(b)
Households Consumer surplus
Group A (50 x 2500) – (50 x 1400) + (50 x 2000) – (50 x 1400) = $85,000 Group B (50 x 2500) – (50 x 1400) + (50 x 1500) – (50 x 1400) = $60,000 Group C (50 x 2500) – (50 x 1400) = $55,000
(c) Shortage = 200 – 100 = 100 units (d) Shortage = 150 – 150 = 0 unit
Since the rent remains at $1,400, Group D households will not demand the public housings. Thus, the quantity demanded of public rental flats is 150 units (Total quantity demanded of Group A, B and C households).
Question 4: Supply and Demand Model
(a) For public rental housing, the supply is controlled by the government and it is mapped out under long-run policy. In addition, as the units of vacant public housing flats are limited and building more estates needs time for planning and completion, the short-run supply of public rental flats is very likely to be inelastic.
On the other hand, the supply of subdivided units is controlled by its property owners, who are very likely to adjust the supply in response to the market situation (i.e. changes in demand and government policies). For example, when the rental price of subdivided units increases, owners will have a greater incentive to renovate their current property into subdivided units, thus increasing the quantity supplied of subdivided units. Therefore, the short-run supply of subdivided units is comparatively more elastic than that of public rental flats.
(b) (i) If the number of low-income households increases, the demand for public rental flats will increase.
If the Housing Authority of Hong Kong raises the limit of income in public rental flat application, the demand for public rental housing may increase.
(ii) If the demand for public rental flats increases, the quantity demanded under the same price level rises. Since the supply of public rental flats remains constant, shortage rises.
(c) (i) When the supply of public rental flats, which are the substitutes of the subdivided units, decreases, the demand for subdivided units will rise.
When the number of low-income households rises, the demand for subdivided units will rise.
(ii) When the demand increases, the equilibrium rent of the subdivided units will rise.
Question 5: Externality
(a) A cost or a benefit that arise from production and falls on someone other than the producer, or a cost or a benefit that arises from consumption and falls on someone other than the consumer64.
(b) Building third runway can bring both external benefits and external costs to society.
For external benefits: Building third runway can increase the airport capacity and facilitate the development of tourism and logistics industry. As a result, the efficiency of the airport will be enhanced; the occurrence of flight delays will be lowered and the flight frequencies to/from certain cities will increase. These factors will attract more tourists and cargo coming to Hong Kong by air.
At the same time, relevant organizations need to hire staff to operate such as construction workers, managerial staff etc. during and after the construction. It can lower the unemployment rate in HK.
For external costs: The construction work could bring air and noise pollution, as well as solid waste which can damage the environment and harm residents’
(c) Yat Tung (1) Estate and Yat Tung (2) Estate.
(d) This could bring external benefits and external costs to the residents.
For external benefits: The demand for construction workers increases during the construction. After the completion, the demand for airport staff also increases.
Also, tourism and logistics sectors will be benefited from the expansion of airport. This will provide more employment opportunities to residents.
For external costs: Apart from the pollution and the damage to the environment and residents’ health brought by the construction of third runway, it will also affect the traffic flows nearby. Assuming that the road capacity and facilities of transportation are the same as before, there will be more traffic congestions. As a result, it will cause inconvenience to residents.
To sum up, the construction of third runway will bring both external costs and benefits to the society. However, Yat Tung (1) Estate and Yat Tung (2) Estate are much closer to the airport than other places; hence the residents of these estates will be subject to such benefits and costs more directly.
(e) No, the possibility is very low. It is impossible for the government to evaluate the net loss of each resident due to the externalities. It becomes a tough job for the government to decide an appropriate compensation amount. Furthermore, there are a large number of residents (reached 41,200 up to September 201365) living in Yat Tung Estates, which increases the transaction costs during negotiation.
Both the lack of objective compensation standard and huge population, therefore, may lead to higher transaction costs and hinder the possibility of an efficient and meaningful negotiation.
65 http://www.housingauthority.gov.hk/tc/global-elements/estate-locator/detail.html?propertyType=1&id=2838 http://www.housingauthority.gov.hk/tc/global-elements/estate-locator/detail.html?propertyType=1&id=7178
Question 6: AD-AS Model
(a) Aggregate demand includes private consumption expenditure, investment expenditure, government expenditure and net exports.
Firstly, the construction costs of public rental housing are investment expenditure66, so aggregate demand of HK would rise. Though the building materials such as concrete are imported from other countries, the values of such materials are included in the cost of building as intermediate inputs.
After the completion, the rent paid by tenants is part of their private consumption expenditure. If most of the tenants can save rental expenses by moving into public rental housing, private consumption expenditure will decrease, hence the aggregate demand will fall. Yet the rental income from tenants cannot cover the daily operating costs of public rental housing, so the Housing Authority has to subsidize a lot. Therefore, government expenditure will increase as well as the aggregate demand.
To sum up, if government subsidizes a lot on the public housing, HK aggregate demand will most likely increase.
(b) The long-term aggregate supply reflects the potential output level/full-employment output level in the economy. As the potential output level depends on the advancement of infrastructure and productivity in the economy, the long-term aggregate supply can be increased only if the government can improve people’s quality of life and hence their productivities by providing more public housing units.
Question 7: Income Inequality
(a) Gini coefficient is used as a measure of income inequality. A Gini coefficient of zero may indicate perfect equality, where everyone (or every household) has an exactly equal income. A Gini coefficient of one may indicate maximal inequality, where only one person (household) has all the income.
(b) Increasing Gini coefficient indicates a worsening income inequality.
(c) Since 2001, the Gini coefficient has increased. From 2001 to 2006, the value increased from 0.525 to 0.533 and then further increased to 0.537 in 2011.
From 2001 to 2011, the Gini coefficient has increased 0.012 in total, which implies a more uneven income distribution.
(d) If original household income is used in the computation of Gini coefficient, possible effects of government taxations and publicly funded social benefits on income distribution may be neglected. The measure may overestimate the degree of income inequality.
(e) The Gini coefficient increased by 0.005 from 2001 to 2006 but remained unchanged from 2006 to 2011. It implies that the income distribution became more uneven from 2001 to 2006; however, the income distribution showed no apparent change from 2006 to 2011.
(f) First of all, the value of Gini coefficient based on post-tax post-social transfer household income is smaller than the one based on original household income.
Also, from 2006 to 2011, the income distribution showed no apparent change with the Gini coefficient based on post-tax post- social transfer household income adjustment data, in comparison to the worsening income inequality shown by the one based on original household income.
(g) Medical benefits and education.
(h) Since low income households can enjoy more publicly funded social benefit, the value of Gini coefficient, computed using post-tax post- social transfer household income, may decrease. It indicates a more even income distribution.
(i) The policy may reduce income inequality but it also incurs economic costs, such as the opportunity costs of land resources and financial resources for alternate uses; and the deadweight loss in the allocation of public rental flats to low income households by non- price mechanism. From the perspective of economics, the government should conduct a detailed cost-and-benefit analysis before making the decision.