Central Provident Fund - A Positive Externality

An example of a positive externality in Singapore is the Central Provident Fund (CPF). Referring back to theory, the Marginal Social Benefit of the CPF equals the marginal benefit of the CPF holder and marginal external benefit derived by the people around the CPF holder.

Part of the monthly salary of full time working Singaporean citizens is channelled towards the Central Provident Fund (CPF). This fund aims to give Singaporeans more financial security in the later part of their life. At the age of 55 years, they are then able to withdraw the money to see them through their retirement. While they are still working, they are able to use their CPF to pay for housing loans and their children’s education.

In relation to the private benefit, this ensures that each working individual will have money set aside to clear pending house loans. The CPF also proves to exert less stress on people nearing retirement as they are assured that the money would come in handy. With financial independence, they are able to stay healthier with less stress and burdens on themselves (and of course their families). In addition, they are able to better take care of themselves in old age, can afford to visit the doctor regularly and cure themselves if they get sick.

Referring to the social benefit, fewer burdens is weighed on the government and tax payers as less

resources are channelled to help pay for the medical bills and daily needs of the retired. Moreover,

paying school fees using the CPF ensures that the child would have a higher chance of staying in

school as savings are chalked up on a consistent basis. Education raises one’s productivity and

increases earning capacity and standard of living. At the same time, lead to an increase in productivity of

other workers working in the same company. With education, their children are inculcated with good morals and are able to find jobs that pay reasonably well and in turn support them (parents) while they are in retirement. It is an additional private benefit when their children support them during retirement as they have an alternative financial support.

Therefore, the Central Provident Fund has proven to be a positive externality.

Melissa

Labels: externality

Cheryl - 10 January
Shumin - 15 January
Chuan Yu - 3 February
Jonathan - 24 February
Grace - 2 March
Alison - 31 March
Adeline - 20 April
Halena - 23 April
Julinda - 9 May
Sheryl - 29 May
Billy - 31 May
Amanda - 4 October
Bernice - 22 July
Francine - 30 July
Bryan - 31 July
Matthew - 31 July
Joshua - 15 August
Janell - 21 August
Sin Yee - 6 September
Ronny - 14 September
Shine - 15 October
Marcus - 5th November
Pei Qing - 10 December
Sheena - 27 December