The implementation of a Sales and Services Tax (SST) can have several effects on the market for cars, as analyzed using conventional microeconomic theory. Let's discuss each of the bullet points and their implications:
Price of cars increase - quantity demanded decrease: When a SST is imposed on cars, it adds to their production costs. As a result, car manufacturers may pass on this additional cost to consumers in the form of higher prices. According to the law of demand, an increase in price leads to a decrease in quantity demanded. Therefore, the quantity of cars demanded is likely to decrease due to the higher prices resulting from SST.
Cars with elastic demand (low-end cars) - price sensitive - quantity demanded decrease: Low-end cars generally have a more price-sensitive demand compared to high-end or luxury cars. Elastic demand means that consumers are more responsive to changes in price. As the price of low-end cars increases due to SST, the quantity demanded is expected to decrease even more significantly compared to high-end cars.
Cars with inelastic demand (high-end/luxury cars) - price insensitive - quantity not much affected: In contrast to low-end cars, high-end or luxury cars tend to have inelastic demand. Inelastic demand means that consumers are less responsive to changes in price. Therefore, the quantity demanded for high-end cars is likely to be less affected by the price increase caused by SST compared to low-end cars.
SST for petrol/diesel vehicles - substitute with EV/hybrid cars (green cars): If the SST is specifically applied to petrol or diesel vehicles, it can encourage consumers to consider alternative options such as electric vehicles (EVs) or hybrid cars. The higher tax burden on traditional fuel vehicles might make green cars more attractive due to their lower operating costs and environmental benefits. As a result, the demand for EVs and hybrid cars may increase, while the demand for petrol or diesel vehicles may decline.
2nd car demand increase: If the price of cars increases due to SST, it might lead to an increase in demand for second cars. This is because households that previously owned only one car might find it less affordable to buy an additional car after the price hike. Consequently, they may choose to purchase a second-hand car instead, leading to an increase in the demand for used cars.
Opt for alternative transport - MRT/LRT/grabcar/car pooling: Higher car prices resulting from SST might motivate some individuals to explore alternative modes of transportation. This could include utilizing public transportation options like Mass Rapid Transit (MRT) or Light Rail Transit (LRT) systems, using ride-sharing services like GrabCar, or engaging in carpooling with others. By opting for these alternatives, consumers can reduce their reliance on private cars and potentially mitigate the impact of higher car prices.
Overall, the effects of SST on the market for cars will depend on various factors, such as the elasticity of demand for different car segments, the specific tax policies implemented, and consumer preferences. The price increase resulting from SST is likely to lead to a decrease in quantity demanded, particularly for low-end cars, while high-end/luxury cars may experience a less pronounced effect. Additionally, the tax burden on petrol/diesel vehicles could incentivize the adoption of EVs and hybrids, while alternative transportation options may become more appealing to some consumers.