Promotional Exam Econs Essay Example

Promotional Exam Econs Essay ST ANDREW’S JUNIOR COLLEGE H1 ECONOMICS (8819) JC1 Promotional Examinations Revision Package 2011 Contents Section A: Case Studies 1. 2007 TPJC Prelims H1 Paper CSQ1: China’s Water Woes 2. 2007 GCE A-Level Paper H1 CSQ1: International Tourism (covered in Lecture) 3. 2008 CJC Prelims H1 Paper CSQ1: The Illegal Drug Market 4. 2009 RVHS Year 5 End of Year Exams Paper CSQ1: Challenges of the Agricultural Sector Section B: Essays 1. 2006 SAJC H1 Final Exams: Application of Demand and Supply – Price Control 2. 2008 SRJC H1 Prelims: Market Failure . 2008 A Levels H2 Essay: Elasticity of DD and SS 4. 2009 PJC H1 Prelims: Theory of DD and SS, Price Elasticity of DD and SS and Market Failure 5. 2009 HCI H1 Prelims: Market Failure 6. 2009 YJC H1 Prelims: How the Macroeconomy Works – Key Economic Indicators and National Income Accounting Section A: Case Studies Answers to the Case Studies Case Study 1: Answers to 2007 TPJC Prelims H1 Paper CSQ1 (a)(i) Compare the perc entage of the coverage of urban water supply with that of rural water supply in China from 1990 to 2015. [2] Coverage of urban water supply is expected to fall slightly from 100% in 1990 to the projected 98% in 2015 [1] while coverage of rural water supply is expected to rise steeply from 59% in 1990 to 85% in 2015. [1] (a)(ii) Is water a public good? Justify. [2] Excludability [1] †¢ For a resource such as water from river, stream or underground water, it is non-excludable. It is too costly and almost impossible to restrict the benefits to those who pay for them (this is only in the case of water which runs across areas like the Mekong River which cuts across countries/Yangtze River – cuts across different states). It is available, free of charge to anyone who wants to use them. OR †¢ However, water in cities, provided by the state municipality, is excludable. Households or plants can be prevented from using this water by cutting supply. Rivalry [1] †¢ Water is rivalrous. The consumption of water decreases the amount available for the next person e. g. wells dry up if too many households dig wells and draw down the amount of underground water available. Rivers dry up if too many farmers divert water for irrigation. OR †¢ Clean drinking water that has been properly treated and purified is finite. One person’s use of the water diminishes other people’s use of it. Hence, water is not a public good. (b)(i) With the aid of a diagram, explain why â€Å"prices of water in China remained only about a third of the world average†. (Extract 2, paragraph 2) [2] Low prices as a sign of price ceiling †¢ â€Å"Prices of water in China remained only about a third of the world average† – concept of price ceiling. Price ceiling is the maximum price set by the government. With reference to Fig. 1, the world average market price is Pw where the demand curve intersects with the supply curve. We will write a custom essay sample on Promotional Exam Econs specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Promotional Exam Econs specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Promotional Exam Econs specifically for you FOR ONLY $16.38 $13.9/page Hire Writer China sets its price below the world average market price at Pc. [1] †¢ Diagram [1] [pic] Figure 1: Price ceiling (Pc) set by China Government to cap Price of Water Alternative answer 1. Subsidies (b)(ii) Who gains and loses as a result of such a policy mentioned in (b)(i)? [4] [pic] (b)(iii) With the aid of a diagram, explain and illustrate how water pollution in China results in market failure. [6] †¢ Students should draw the diagram for negative externality (water pollution) and explain how the water pollution causes the market to fail. pic] Figure 2: Water pollution as a negative externality †¢ Water pollution is a form of negative externalities. Externalities are defined as spillover effects to the third party arising from production or consumption activities. †¢ In the presence of negative externalities, marginal social cost (MSC) will be greater than marginal private cost (MPC). This is because the marginal social cost takes into account the marginal extern al cost. MSC=MPC +MEC (MEC) to the third party, in this case, ruined crops of farmers, health problems etc. From Fig 2, MSC is above MPC. Private equilibrium occurs at Qp where MPB = MPC. The socially optimum level, however, occurs at Q*where MSB = MSC. There is an overproduction of the good. At the private output Qp, MSCMSB and society will be better off if one less unit is produced. For all the additional units produced in excess of Q*, the welfare loss is represented by triangle abc. (c)(i) If you were the Minister for Environment, explain whether the water industry should be privatised. (indicated in the revision package to ignore this qn. ) [6] c)(ii) Evaluate the effectiveness of the current measures taken by the government as mentioned in Extract 1 as well as one other measure to reduce water pollution in China. [8] †¢ Students to be able to comment on the advantages and disadvantages of the current measures taken (i. e. imposing water quality standards, forcing heavily polluting industries to close, expand the use of alternative sources such as rainwater and recycled sewage) and to evaluate. †¢ Students to be able to explain one other measure and to evaluate the effectiveness of those measures (for example, imposing a tax or pollution permits). Imposing water quality standards Advantages: Ensure that the current water supply available will be of a quality standard and hence less external costs arising from the consumption of unclean water. Disadvantages: Difficulty of monitoring in a big country like China especially in rural areas. Since water is provided by local governments, they will incur the cost in ensuring the quality of the water. †¢ Forcing heavily polluting industries to close Advantages: Less water pollution and hence less money wasted in cleaning up water. Also, there would be more clean water available for consumption. Disadvantages: The industries may relocate to another country, e. g. India. This affects the economic g rowth of the country especially now that China is opening up its market. Also, the closure of the industries may lead to laying off of local workers and this may result in unrest. †¢ Expand the use of alternative sources such as rainwater and recycled sewage Advantages: Reduce dependency on the original sources of freshwater and hence the cost of getting more water from these rivers e. g. building of canals. Disadvantages: Takes time to come into effect. May require high cost in turning these alternative sources into fresh water for consumption. †¢ Tax on pollution An ad valorem or a specific tax can be imposed on firms who are involved in the pollution. The tax will add on to the costs of production and hence causing the supply curve (MPC) to shift up. The tax is effective in reducing water pollution if it fully internalises the marginal external cost. i. e. the amount of tax imposed is exactly the same as the amount of MEC. Taxes imposed must thus be flexible so that they can be varied to reflect changes in MEC. However, it is difficult to measure the marginal external cost and hence the amount of tax to be imposed. Also, the effectiveness of the tax depends on the price elasticity of supply. CSQ 2 – ans covered in Lect Case Study 3: Answers to 2008 CJC Prelims H1 Paper CSQ1 a) i) Compare the trend in retail cocaine prices in Europe and the USA from 1990 to 2005. Any of the 2 below. [2] Both are falling. Europe †“ fall by 50. 6%; USA – fall by 62. 3%; Prices in the USA falling at a faster rate Prices started to rise after 2002. Retail prices in the USA consistently higher than in Europe i) With reference to the data and using economic analysis, account for the trend in retail cocaine prices observed above. [4] Using demand supply analysis, explain why there is a falling trend (1990-2002) From Extract 3, plans to reduce both demand supply; Demand falls at a faster rate than the fall in supply. Illustrate with a diagram Also accept answers that explain why prices are rising from 2002-2005 Demand factor: From Table 2, demand fell (2002-2005) Supply factor: From Figure 1, supply fell Supply fell proportionally more than the fall in demand ( price rise ii) Account for the difference in wholesale prices of cocaine between Europe and the USA. [2] Possible reasons Higher cost of production; possibly due to higher transport costs Higher demand in Europe Any well explained demand or supply factor will be awarded 2 marks. b) i) Explain the market failure created by drug abuse. [4] Drug is a demerit good; goods that generate negative externalities that are deemed undesirable by the political process. Explain negative externalities with the aid of a diagram. Explain how MSC MSB results in market failure. Explanation of how underestimating private cost results in a demerit good ii) Evaluate the use of a ban on illegal drugs to correct this market failure. [6] Explain how a ban works on the market for drugs. With the aid of a diagram (diagram is not necessary as long as you are able to explain it clearly using proper economic analysis), show how a ban is efficient in correcting the market failure. Evaluate the use of the ban. c) With reference to the data, discuss the effectiveness of â€Å"Plan Columbia† and suggest alternative measures the government could adopt to bring about a more efficient allocation of resources. 12] Effectiveness: To a certain extent, it was effective as it reduced demand from 2002-2005 from 33. 9 million to 33. 7 million users, as seen from Table 2. However, demand started to rise in 2006 to 35. 3 million. Effectiveness in curbing demands is therefore inconclusive as data provided stopped at 2006. As for controlling supply, as seen from Figure 1, supply fell from 2000 onwards, which could be a sign of the plan working. However, the supply started to increase again in 2006, increasing by 16% in 2007. Also, the effectiveness was limited as even if the authorities sprayed herbicide, coca farmers moved elsewhere replant the crop because of its very profitable potential (4 times more than the most profitable legal crop). Alternative measures: Taxation Legislation Quotas Minimum of 2 well explained policies, with good evaluation. Case Study 4: Answers to 2009 RVHS Year 5 End of Year Exams Paper CSQ1 (a)(i) Calculate the change in the crude oil prices between 2007 and 2008. [1] 42. 86% (1m) (ii) Compare the level of projected soybean exports of the U. S with that of Brazil for the period between 2004/05 and 2015/16. 2] US’s exports are decreasing while Brazil’s exports are increasing over this period. (1m) Before 2007/2008, the soybean exports of USA are consistently higher than that of Brazil’s but after 2007/2008, the projected soybean exports of Brazil are higher than that of the USA. (1m) (iii) Using demand and supply analysis, account for the trend of the pro jected soybean exports for Brazil between 2004 and 2016. [5] The increase in the projected soybean exports could be due to an increase in the production in Brazil which is fuelled by an increase in demand and supply. Due to the increase in the prices of oil, according to the law of demand, quantity demanded of oil will decrease. This will lead to an increase in the demand for biofuels because oil and biofuels are substitutes. With a rightward shift in the demand for biofuels, the prices of biofuels will increase and quantity supplied for biofuels will increase as well. With a higher quantity supplied for biofuels, the demand for soybean will increase because soybean is a factor of production for biofuels. (2m) There is also an increase in the supply of soybean due to the improvement in technology, which resulted in development of new varieties of soybean suited for the rainforest climate. Therefore, the improvement in technology lowers the costs of production and suppliers will find it cheaper to produce soybeans now. As a result, they will produce more and supply increases. (2m) Market for Soybean in Brazil Referring to the diagram above, initial output is at Qo where DD cuts SS. After DD shifted to DD1 and SS to SS1, there is a new intersection at Q1, accounting for the increase in production hence an increase in the projected soybean exports. 1m for correct diagram showing an increase in total output) (b)(i) Suggest two reasons why the Brazilian government encourage the use of alcohol- based fuel. [2] The Brazilian government may want to reduce the country’s reliance on conventional fuel (1m) and to reduce the amount of pollution, which is an external cost to the society. (1m) (1 m for every valid reason) (ii) Explain how the use of alcohol-based fuel in Brazil affects the costs of car usage. [4] Costs of car usage include private costs and external costs of driving. Private costs of driving have been reduced (1m) because alcohol-based fuel is cheaper given the relatively lower production costs to conventional fuel. (1m) External costs of car usage are reduced (1m) because less pollutants are emitted. (1m) (c) Discuss the possible links between climate change and the agriculture sector. [8] Agriculture contributes to climate change †¢ The expansion of agriculture sector resulted in clearing of vegetation and deforestation for more farmland and this has led to less plant resources to store carbon, contributing to higher emission of green house gases and adverse effect on the climate. The use of intensive farming methods and modern farming techniques emphasizes farm productivity. The use of heavy machinery and industrial pesticide in intensive farming has similar negative impact on the environment. Widespread use of pesticides destroys farmland food chains and at the same time, a substantial portion of pesticide residue ends up in the environm ent, causing environmental pollution and biodiversity decline. †¢ However, if there are policies adopted by the agriculture sector or any forms of government intervention to reverse the damage of agriculture on the environment, e. . incentives to encourage the practice of non-intensive farming and reforestation programme, then the agriculture sector may not lead to adverse climate change. Climate change adversely affects agriculture †¢ Climate change can in turn affect the quantity and quality of the harvest of agriculture produce. The changing climate conditions lead to wider fluctuations in supply, since supply of agriculture products is price inelastic, this has led to instability in the prices of agriculture products causing the income of the farmers to fluctuate more severely. Thus, climate change has significant impact on the agriculture sector. †¢ However, the government often adopts policies to stabilise food prices by setting price control (price ceiling on major staple food) to ensure consumers are protected against rising food prices and/or protect the income of farmers through farm subsidies. These measures will reduce the adverse effect of a climate change on the producers and consumers in the agriculture sector. (d) Explain how the system of tradable obligations works and evaluate if the government should use such a policy. [8] System of tradable obligations Each year, the government decides how many acres of land should be devoted to non-intensive farming and decides on the number of tradable obligations to be allocated to each farmer. †¢ Each obligation specifies the acreage the farmer is required to farm in a nonintensive manner. If a farmer wishes to farm intensively, he can pay another farmer who practises non-intensive farming to t ake up his obligation. Strengths of tradable obligations †¢ This system recognises that different types of farms are of different efficiency levels when it comes to farming techniques. Intensive farms would pay efficient nonintensive farms to relieve them of their obligations. Both intensive and non-intensive farmers can gain as intensive farmers would probably pay less than if they had to devote resources to farm non-intensively themselves. Non-intensive farmers would probably get paid more than what it cost them to take over the obligations to farm non-intensively. A market-based system like this would be economically efficient and this would help sustain non-intensive farming and farm-reliant communities. The system would be flexible and easily adaptable to changing economic and environmental conditions since a different target for non-intensive acreage could be set each year. †¢ Both the systems of tradable obligations and farm subsidies encourage nonintensive farming but comparatively, tradable obligations could cost the government far less than if it should adopt a system of farm support and subsidies which causes more distortions. Limitations of tradabl e obligations †¢ The government may have to decide on what is an appropriate or optimal number of tradable obligations to issue each year. If too low, may not lead to significant cuts in external cost of intensive farming methods. If too high, may cause even greater welfare loss to society, thus the government needs to have good knowledge of how the agriculture sector operates and the alternative technology that could be adopted by the sector in reducing the external costs. †¢ Monitoring to ensure that farmers fulfill their obligation of non-intensive farming and tracking where the obligation has been traded, and continual inspection to ensure compliance may incur further cost in the implementation of the system. †¢ Alternative: taxes Answers to the Essays 1) 2006 SAJC H1 Final Exams The government has removed the price floor imposed on Malaysian Airlines under the new domestic aviation policy. Airfares will now be determined by supply and demand factors. It is about time the (Malaysian) government stopped controlling airfare tickets. The Straits Times, 10 July 2006 (a) Using the above context, explain the meaning of a price floor and discuss the underlying rationales behind its implementation. [12] (b) To what extent do you agree that the government should stop controlling the price of air tickets? 13] Part (a) Define price floor, in the context of the domestic market for Malaysian Airline tickets. Illustrate the price floor by means of a diagram. The diagram should indicate: Definition of the market; Pe and Qe under a free market; price floor above Pe; a surplus (Qs – Qd); the area showing the loss of consumer surplus. Discuss the underlying rationales: 1. The government perceives that Pe, as determined by free market forces is too low. Hence it sets a minimum price via intervention. 2. Government wants to protect the domestic airline. Why? Due to inefficiencies in the firm, total costs are high. Hence government hopes that the minimum price (higher than Pe) would then help cover the costs. 3. To protect the workers working in the aviation industry (stewards, pilots, technicians, baggage personnel). The wage of these workers is largely dependent on the profits of the airline. If the government perceives that the aviation sector is important to the economy, the implementation of the price floor is all the more important. 4. The government is concerned that MAS may not be able to cover its high initial set-up costs (sunk costs). Given that the government has a stake in MAS, it would want to earn sufficient revenue to cover these costs. NOTE: A thorough discussion of any 2 rationales is sufficient. No evaluation needed here. |Knowledge, Application, Understanding and Analysis | |Level |Descriptors | |L3 |Good to thorough knowledge of price floor and its rationales. Clear explanation, showing good knowledge of| | |facts and ability to apply within the context of the question. | |L2 |Fairly good grasp of knowledge of a price floor. Accurate though underdeveloped explanation of the | | |underlying rationales. Some attempt to apply to given context. | |L1 |Skimpy or smattering of points with no proper diagram illustrating what a price floor is. Answer ranging | | |from mostly irrelevant to showing basic conceptual errors in explanation. No attempt to apply to given | | |context. | Part (b) A balanced argumentative approach has to be displayed by the candidate within the context. Thesis: 1. The deadweight loss that results from government intervention. Problem of surplus of tickets: Loss of CS Consumers who are willing to pay for the ticket at equilibrium price are forced out of the market. Consumers who still remain in the market pay higher price now. Hence consumers are worse off with a price floor. Possibility of the loss of PS – The airline is flying its flights at a less than full capacity. It is not as cost effective when the number of air crew remains the same even if half the plane is full. Government may have to give a lump sum subsidy to compensate the firm for the loss in revenue at this higher price. Is this a waste of tax payers’ money? Consider the opportunity costs of using the government’s funds in this way. 2. Managing the demand and supply determinants may be a more socially optimal approach as opposed to price control. What should the government do instead of having a price floor? i) Increasing the demand for Malaysian airline tickets for domestic flights Advertising Price of related goods – Complements (have tie-ups with business partners such as domestic travel agencies) ii) Retraining the workers in the aviation firm such that they are able to get higher wages on the basis of their higher productivity. Equip them with the skills such that they are occupationally mobile. Anti-thesis arguments have already been discussed in part (a). i. e. The government should continue controlling the price of airfare tickets. Stand: To a large extent, the government should indeed leave the price of air tickets to the price mechanism. Additional credit should be given for the mention of a cost-benefit analysis in the decision process. |Knowledge, Application, Understanding and Analysis | |Level |Descriptors | |L3 |Clear explanation of how welfare loss is accounted for. A well balanced discussion on the issue. Suggestions of | | |alternative policies in place of a price floor to achieve intended objectives, with ample development. |L2 |Fair grasp of how the price floor leads to loss of welfare to the different groups of people in the market. | | |Undeveloped suggestions on what the government could do instead. | |L1 |Too general; lacks direction with no clarity with regards to the loss of welfare to the different groups of people| | |in the market. | Allow up to 4 additional marks for Evaluation |Level |Descriptors | |E2 |A clear judgment on the issue, showing evidence of real-life contexts. Evaluation of alternative policies stated in | | |place of a price floor in achieving intended rationales. | |E1 |Merely stating a stand on the issue, with raw justification. | 2) 2008 SRJC H1 Prelim â€Å"Chinas booming economy is driving a rapid rise in water pollution so severe that densely crowded cities could be left without adequate supplies,† said a Cabinet minister on Tuesday. The government has tried in recent years to rein in environmental damage by imposing water quality standards. But such efforts have had only limited success. Adapted from China Daily News, 30 March 2008 a) Explain how water pollution gives rise to inefficiency in resource allocation. [10] (b) Assess the policies which a government can adopt to deal with inefficiency in resource allocation arising from water pollution. [15] Part (a) Introduction †¢ Define efficiency in resource allocation: Economic efficiency in the allocation of scarce resources is achieved if it is not possible to change th e existing resource allocation to make someone better off without making someone else worse off. †¢ Explain the meaning of inefficiency in resource allocation: Resources are allocated in a way whereby social optimal level of output is not met. Society welfare is compromised when resources are allocated in a way that no right type or amount of the good is produced or the good is not produced at the lowest possible cost. Body: Explain and give examples of private costs, external costs, social costs ? Private costs to individual producer include explicit cost of producing the good. For example, cost of inputs such as cost of raw materials/semi-finished goods (steel), cost of capital such as machines, cost of labour such as wages of workers and cost of land such as rent of factory space. There is also the external cost to the society of implied depletion of natural resources such as clean river. ? External costs refer to costs incurred by 3rd parties who are not directly involved in the production / consumption of a good/service and these 3rd parties are not compensated for the damage done to them. ? In this example, the external costs to 3rd parties include the harmful effects on the health of people around the industrial area such as skin diseases or illness related to consumption of contaminated water, thus resulting in medical bills incurred and these 3rd parties are not compensated for the damage done to them. Due to the existence of externalities, social cost of producing the good is the sum of the private and external costs. Well-labelled diagram Explain Qm and Qs and conclude over production and wastage of resources ? When left to itself, private individuals who consider only their own private costs and benefits will produce up to the point where MPC=MPB at Q m. ? However, the socially optimal level is where MSC=MSB at Qs. ? Since Qm ; Qs, there is overproduction of such goods leading wastage of resources and market failure. Explain DWL ? Between Qm and Qs, each additional unit over consumed adds more to costs than to benefits since MSC;MSB. Hence, total welfare loss to society as a result of over consumption is measured by the shaded triangle, known as deadweight loss. Conclusion: Personal Comment: Since inefficiency in resource allocation represents wastage of resources, it is necessary for the government to intervene to solve the problem of water pollution in China so as to increase the welfare of the society. Mark Scheme: L1 |Explanation of how externalities lead to market failure with basic errors in concept and/or application to context. | |L2 |Generally clear explanation with some attempt at application. | |L3 |Clear explanation of concepts with strong application to given context. | Part (b) Intro: Direction of essay: to discuss at least 3 measures to solve the problem of pollution Body: Taxes †¢ Impose a tax on production equal to the marginal external cost. A tax on production has the same effect as an increase in the cost of production of the firm. The tax shifts the firm’s marginal private cost curve vertically upwards by the full amount of the tax. †¢ If the tax is calculated to reflect accurately the marginal external cost the firm inflicts on a third party, the firm is then said to internalize the external cost. The resulting higher cost now induces him to reduce production to an amount equal to OQs which is the socially optimum output level where the marginal social cost is equal to the marginal social benefit (MSB = MSC). The welfare loss arising from overproduction is thus eliminated. Evaluation Fair because it is according to the ‘polluter-pay’ principle. †¢ Many economists favour the tax solution to correct externalities because it still allows the market to operate. Hence, benefits of consumer sovereignty and the automatic working of the price mechanism prevail. Hence, it promotes efficiency. †¢ It also forces firms to take on board the full social costs of their actions. Thus, it is fair because it is according to the polluter-pays principle. †¢ The tax thus acts as an incentive over the long run to reduce pollution: the more a firm can reduce pollution, the more taxes it can save. By taxing firms for polluting, producers may be encouraged to find cleaner ways of producing an output. †¢ The main problem of using this method is that there is imperfect knowledge. The damage from pollution is extremely difficult to assess. It is also difficult to apportion blame. For example, the damage to lakes in China has been a major concern. However, just how serious that damage is and what are its monetary costs, are difficult to assess. An overestimation or underestimation of the size of the external cost would mean either a less than or more than social optimum level of output respectively. Other problems include the need for manpower to assess the tax. This imposes an additional burden on the government. †¢ Better than fines because there is incentive to look for more eco-friendly way of producing the good Tradable Permits Emissions trading (or emission trading) is an administrative approach used to control pollution by providing economic incentives for achievin g reductions in the emissions of pollutants. It is sometimes called cap and trade. A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society. Evaluation †¢ Like taxes, it is market-based solution. Thus, allows market to operate – promotes efficiency in resource allocation. †¢ Incentive for firms to reduce pollution esp. if the permits are sold by the govt and not allocated free. †¢ Enforcement issues – if pollution permits are to be successful then firms need to be regularly policed and inspected. This clearly will be expensive and therefore involves an opportunity cost issue. Difficult to determine what is the level of permits to be issued to begin with? This is the most important issue, as if too many are issued (possibly by governments under political pressure) then the price of permits will collapse and the system will be rendered ineffective. †¢ It is impossible to accurately measure emissions. If output levels are used as a guide t o pollution, then this ignores the possibilities of low emission technology. †¢ Permits lead to increased costs for firms which will damage their international competitiveness. This could lead to inflation if firms pass on higher costs to consumers. †¢ Pollution permits will only be effective if introduced on a global basis as firms will otherwise switch production from one country to another. Rules and regulation: Penalty/Fines The government can impose severe penalty such as fines on factories which release toxic chemical wastes into river system. In a way, this will act as deterrent to the producers in contributing to water pollution in China. Evaluation: It has the power of law behind it (ie it is enforced by the state). Such laws can lead to a change in behaviour. Fines provide an incentive to change behaviour / a deterrent against bad behaviour. †¢ Simple to understand/easy to implement. †¢ Regulation provides a quick solution / immediate impact. †¢ Regulation backed up by fines will raise government revenue. This could be used to correct the negative externality or to compensate those suffering from the negative externality. Howev er, it is a blunt weapon to discourage water pollution. Affects all firms equally. †¢ There is no incentive to look for more environmentally-friendly ways to produce the goods. †¢ Difficult to estimate the correct amount of fines – same problem as tax. The government has to employ supervisors to monitor or closely watch pollution emissions from industrial, farming and other sectors. This entails administrative costs which can be very substantial in some countries. The government has to weigh the costs and benefits to assess the effectiveness and desirability of this measure. If the benefits derived from successful implementation of measure i. e. cleaner rivers are greater than the costs incurred in channeling resources towards employing supervisors and conducting monitoring checks, then this measure should be adopted by the government. Licensing To control the total amount of pollutant emissions, authorities will devise a license system for emitters of wastewater containing toxic or radioactive materials. Without the license, enterprises will be banned from discharging pollutants into water. Evaluation: †¢ For smaller firms which are not able to afford the license, they will have to stop production completely. This may lead to retrenchment of the workers in that factory which may lead to additional burden for the government to provide financial aid to these workers. With the firm being out of production, it may also deprive the people in the area of the supply of the good. †¢ (ranking: 4th)- Not as effective as penalty because the factories are still allowed to discharge pollutants into the river system even though the amount is not reduced. Moral suasion/Educating the public †¢ The government can educate the public through schools or via campaigns or media to reinforce the message of the importance of keeping the rivers clean or eliminating the problem of water pollution in China. Awareness of the negative consequences of water pollution such as related illnesses, reduction in supply of fish or even a threat to their source of drinking water supply can be highlighted. 3) 2008 A Level H2 Essay In 2005 the rate of Goods and Services Tax (GST) in Singapore rose from 3% to 5%. Incomes rose by approximately 4. 5% in 2005. a) Explain the likely effect of this change in GST on expenditure by consumers on different types of goods. [10] [Note: Before we begin this essay proper, it would be prudent to introduce the relevant concepts. In this case Demand, Supply and the Price Elasticity of Demand (PED) are involved. ] The supply of a good is the quantity that producers are willing and able to produce and offer for sale at various prices over a period of time, ceteris paribus. The law of supply states that there is a direct relationship between price and quantity supplied. In other words, it is drawn as an upward sloping curve. On the other hand, effective demand is the desire to possess a good or service backed up by the ability and willingness to pay for a good or service over a range of prices in a given period, ceteris paribus. The Law of Demand states that there is an inverse relationship between price of the good and its quantity demanded. Thus, it is drawn as a downward sloping curve. Price elasticity of demand (PED) measures the degree of responsiveness of quantity demanded to a given change in its price, ceteris paribus. It is calculated by dividing the percentage change in quantity demanded of a good with the percentage change in its price. Demand is price elastic when quantity demanded responds more than proportionate to price changes. On the other hand, demand is price inelastic when the change in quantity demanded of a good is less than proportionate to the change in its price. It would be fair to assume that consumers and producers are rational and seek to maximise satisfaction and profits respectively. Application of Theory and Examples A tax is a non-price determinant of supply and will cause the price at every quantity supplied to rise as producers raise their prices to accommodate the tax commitment (payment) to the government. Hence, the effective supply curve contracts or shifts to the left. With GST being an ad valorem tax, this would also mean that the supply curve will also pivot anti-clockwise upwards while shifting. How the movement of the supply curve will affect consumer spending depends on the nature of the demand curve. Some products have price inelastic demand curves and are likely to see an increase in expenditure while others have price elastic demand curves that are likely to see a fall in expenditure. Price Inelastic Demand: A good example of such a good is petrol or diesel. According to the determinants of PED, motor fuel is a necessity for commercial livelihood and even personal transportation to those who live far away from their work place. Additionally, there are also few substitutes for petrol/diesel as electric power cars are impractical while compressed natural gas modifications to cars force them to sacrifice boot space and possibly even engine power. With this in mind, the following might happen (Fig. 1): [pic] As the price of fuel rises from P1 to P2 due to the imposition of higher GST which reduces supply from S1 to S2, the quantity demanded falls from Q1 to Q2. However, the total expenditure (price x quantity) actually rises from 0P1AQ1 to 0P2BQ2. This is because the percentage fall in quantity demanded is more than offset by the percentage increase in price. Price Elastic Demand: A prime example of this would be holiday packages to Europe, the U. S. and even New Zealand. These are usually quite expensive with rates as high as $3000/head. Hence, as the proportion of income spent is quite high, a change in the price would significantly affect the affordability of the holiday package. For example, a 2% rise in the price due to the change in GST might cause many holidaymakers to switch from visiting Europe to a cheaper destination like Taiwan. It might also be said that holidays to faraway destinations would be considered as luxuries as opposed to trips to Asian countries like Thailand or Vietnam. Hence, as most consumers in Singapore might consider the former destinations to be optional, the increase in price would lead to a greater than proportionate fall in quantity demanded. To illustrate the effect of the higher GST on price elastic goods like holidays to Britain, please refer to Fig. 2: [pic] With a contraction of the supply curve from S3 to S4, the price increases to P4 from P3 and the quantity demanded falls to Q4 from Q3. However, it should be noted that the total expenditure of all consumers has shrunk from 0P3EQ3 to 0P4FQ4. This is because the percentage fall in the quantity demand is more than the percentage increase in its price. It can thus be said the producers of goods with a price inelastic demand would benefit from a rise in the GST (while consumers would suffer and spend more for lesser quantity demanded). However, the Singapore government has decided to cushion the impact of the GST hike by ensuring that household necessities (e. g. washing powder, toiletries, etc) and essential foodstuffs (e. g. bread, rice, cooking oil) sold in government affiliated supermarkets (NTUC FairPrice) are not subject to the GST hike. Level |Descriptors | |L3 |Answer shows a good knowledge of the facts and theory of the question, clear evidence of the ability to use facts and| | |theory with accurate reference to the question. | | |Excellent ability to describe explain this in a precise, logical, reasoned manner. | | |Answer covers both price elastic and inelastic demand with clear and detailed examples given. | | L2 |Theoretical foundation is correct and reasonably complete. Question has been understood with correct graphs drawn | | |theories correctly applied. | | |The answer is approached in a one dimensional manner. (i. e. only one PED scenario is given). | | |Examples might be given but lack details/relevance. | |L1 |Answer is mostly irrelevant | | |Answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped. | 4) 2009 PJC H1 Prelims Beginning in 2012, all airlines arriving or leaving from airports in the EU would be obliged to buy some pollution credits, joining other industrial polluters that trade in the European emissions market. For consumers, such rules could mean further increases in air fares. Adapted from New York Times (28th June 2008) (a) Explain the extent to which airlines can successfully pass on the cost of pollution permits to passengers. [10] (b) Evaluate if pollution credits are an efficient method to internalise the externalities associated with air travel. [15] Part (a) 1. Intro Identify that pollution permits add on to the COP for airlines ( fall in provision of airline tickets (fall in ss) The extent to which airlines can pass on higher COP in the form of higher prices to consumers will depend on the relative elasticity of dd and ss 2. Body 2. 1 Explain how airlines can pass on the higher COP to businessmen and very rich since dd is price inelastic especially on long haul travel (international) Given that dd is price inelastic for businessmen (little substitutes) as they have to arrive at their intended destination for corporate meeting Given that dd is price inelastic for the very rich (air tickets takes up a small % of their income) Given that dd is price inelastic for long-distance travel (lack of good alternative travel modes) A given rise in price results in a less than proportional fall in quantity demand for air travel ( hence TR increases from PoQo to P1Q1 Illustrate with the aid of dd-ss diagram 2. 2 Explain how airlines will find it more difficult to pass on higher COP for holiday travelers (economy class) and on short distance travel (transatlantic travel) Given that dd is price elastic for holiday maker as they are sensitive to price changes (takes up a huge % of income spent and could make alternative travel plans) Given that dd is price elastic for short distance travel (availability of other travel modes eg. car, train and ferry with EU) A given rise in price results in a more than proportional fall in quantity demand for air travel ( hence TR decreases from PoQo to P1Q1 ? less effective Illustrate with the aid of dd-ss diagram 3. Conclusion It depends on the type of customers and type of flights. Mark Scheme Knowledge, Application, Understanding and Analysis | |Level |Descriptors | |L3 |For a well developed and structured that gives both sides of the explanation. Good application to the EU context. | |L2 |For an undeveloped answer as to how airlines can pass on higher costs to consumers. Answer is mainly one-sided. | | |Rigor is lacking. | | |Some attempt to apply to the context. |L1 |Mere listing of points. | Part (b) 1. Intro Av iation is one of the fastest growing area of the carbon emissions in EU Define pollution permits Identify that pollution permits is a possible method to internalize the externalities 2. Body (i) Highlight the problem of –ve externalities GHG emitted by air planes ( millions of metric tonnes more carbon dioxide being created each year from additional aviation traffic. Negative externalities created by airlines who are only concerned about their own marginal private benefit and cost and ignore external cost (of GHG) on the environment. Give examples of MPC: cost of running the airline (cost of hiring fop) Given examples of MEC: external cost to environment (air pollution, respiratory diseases, noise pollution and congestion to those living near the airport, global warming and climate change) Hence MEC creates the divergence between MPC and MSC Illustrate with aid of MSB and MSC diagram When there is a negative externality, the community bears costs additional to those borne by the individual firm or consumer. The MSC of the activity exceeds the MPC. To the individual airline producer, he will produce up to the point where MPB=MPC (private efficiency). He does not take into account external costs. Qp is being produced. However, the socially optimal level of output is at Qs, where MSC=MSB. There is overproduction/ over-consumption of the good that generates negative externalities, and hence a welfare loss to society occurs. At Qp, the MSC;MSB. One extra unit of output adds more to costs than to benefits. So by decreasing production to output Qs, society can avoid the welfare loss. The market fails because pareto optimality has not been achieved at Qp. Indicate that there is over-production of air travel (Qp vs Qs) and over-consumption of air travel by travelers (ii) Thesis: Yes, Pollution credits appear to be an efficient method Explain and assess the workings of pollution credits in the air travel industry EU is to set a cap on the total allowable level of emissions (qty of CO2 emission) each year. EU divides quantity into tradable permits and ration to individual airlines. Airlines trade carbon permits. If the airlines produce less its quota of CO2 emission, airline gets a credit. This can be sold to another airline (for money), allowing it to exceed its original limit. Polluters have to pay for the external cost they inflict (when they buy credits) on society. Provides incentives for airlines to reduce emission so that additional permits can be sold to other firms. Trading of permits continue until all profitable opportunities have been exhausted. Advantages of pollution credits (+) certainty since the overall level of pollution will be reduced as EU can set the level of emissions it deems desirable. Disadvantages of pollution credits (any 2 with elaboration) -) This system can involve very high administrative cost due to the complexity of the trading scheme especially when many organisations are involved. â€Å"Thorny issues† involved like the proper level of the cap, timing and certification procedures. During implementation period from now to 2012, airlines continue to emit carbon with no cost consequences. (-) Overly dependence on the market to det ermine the â€Å"fair price† of pollution. Uncertainty of pollution permits due to market fluctuations. Relies on market participants to determine the fair price ( may devolve into a system for producers to raise their prices so as to maximize profits -) Pollution credits are mainly for air pollution and does not consider noise pollution and car congestion especially near for residents living near the airport. (-) Consumers to bear the brunt of high prices as airlines could replace inefficient oil guzzling airplanes with more efficient and costly technologies. (-) Difficulty of estimating the ideal quota level. EU could over-issue too many credits, it defeats purpose of cap as level of carbon emission emitted exceeded optimal level ( Govt Failure. (iii) Anti-Thesis: Other Methods Alternative Policy 1: Carbon Tax The government can impose a carbon tax = MEC on each unit of output. The tax forces the firm to take into account the external costs, raising the MPC to be at the same level as the MSC. Faced with the new supply curve, the firm will reduce production to Qsoc, which is the socially efficient level. The welfare loss to society has been eliminated. Taxes can either be imposed on airlines or tax can be imposed on consumers Advantages of tax system: The tax system still allows the market to operate, and also acts as an incentive and encourages firms to seek low-cost alternatives such as installing certain antipollution devices or use cleaner fuels to reduce emission so as to pay less tax. The revenue from the tax could be used to pay for the external damages from the production of the product. Disadvantages of tax system: There is a lack of knowledge and difficulty in measuring the value of MEC accurately in monetary terms, as externalities are â€Å"unpriced† effects. If the external costs are overestimated, the government may levy excessively high taxes that more than correct for the actual external cost, resulting in underproduction of the good and thus greater inefficiency in resource allocation. Each airline produces different levels and types of externality, and it is administratively difficult and infeasible to charge each airline its own particular tax rate. The extent by which a tax can reduce the externality produced is uncertain, depending on the elasticity of demand for the good. Alternative Policy 2: Command and Control Regulations (Legislation) Set uniform standards for airlines to reduce carbon emission (1) Technology-based standards ( specify method/technology that airline must comply with regulation (2) Performance-based standard ( set uniform control target for firms flexible in how target is being met Evaluation A legal maximum ensures certainty in outcome; there is a cap on the maximum amount of externality produced. However, legal maximums tend to be a rather blunt weapon, as there is no incentive for firms to reduce emissions below the permissible level. Alternative Policy 3: LT: Should invest in developing lighter and cleaner planes and fossil-free fuels. Evaluation Cost of R ( reduces profits margins Long gestation period before R bears fruits 3. Conclusion Carbon emissions which results in global warming is an international problem and will require international assistance and cooperation. EU will need to seek cooperation from other countries around the world. Other sources of carbon emission will also need to be tackled. Marking Scheme |Knowledge, Application, Understanding and Analysis | |Level |Descriptors | |L3 |A well-balanced and structured answer that provides 3 policies to resolve negative externalities associated with | | |air travel. Good application to EU context. | |L2 |For an undeveloped answer that only explains 2 policies. For an undeveloped answer that explains policies with no | | |application to context. | |L1 |Mere listing of the policies. Some conceptual errors. | |Level |Descriptors | |E2 |For a reasoned assessment of the effectiveness of the policies in internalizing the externalities. Acknowledgement of | | |govt failure and the need for international cooperation. | |E1 |For an unexplained assessment of policies. | Evaluation: †¢ Moral suasion/Educating the public on the negative consequences of water pollution is considered the best measure since it tackles the root of the problem by raising awareness via changing the mindset and making the people more conscious of the consequences of their actions. †¢ However, it takes time to see the effectiveness of this measure. Hence, the government needs to consider other measures to tackle the problem in the short term. Conclusion: Personal comment: The fact that it is given in the preamble that â€Å"such efforts have had limited success† seemed to imply it is impossible to eradicate the problem of water pollution completely. The government has to re-consider both the short-term and long-term effects of such measures as well as the limitations of each measure. In my opinion, a mix range of measures have to be adopted in addition to the ones currently in place. Mark scheme: |L1 |Explanation of the policies with basic errors in concept and/or application to context. |L2 |Generally clear explanation of policy to reduce the problem of water pollution with some attempt at application. | |L3 |Clear explanation of policies with strong application to given context. There could be brief attempt at the evaluation of the | | |policies. Evaluation/ranking may not be consistent across all policies. | |L4 |Clear and thorough evaluation of the policies. Insightful analysis on how resources are allocated mo re efficiently using each | | |policy with reference to other policies. | 5) 2010 HCI H1 Prelims The Singapore Government vowed to improve drainage and step up alert systems after parts of the city-state were hit by flash floods, damaging homes and business. The Straits Times, 20 July 2010 (a)Explain what is meant by public good and consider whether the flash flood alert system is an example of a public good. [10] (b)Discuss whether government intervention in the markets for goods and services within Singapore should be restricted to the provision of public goods. [15] (a)Introduction Public goods are those goods or services that are non-rivalry and non-excludable in consumption. Whether the flash flood alert system is an example of a public good depends on its characteristics; do they fit into the category of good/service that is non-rivalry and non-excludable? Body The flash flood alert system relies on the meteorological forcast of the weather, ie, whether will there be impending heavy rainfall and rising tide. If there is an impending heavy downpour, alert will be sent out or broadcast to the neighourhood near the vicinity to warn people of likely ocurrence of flood. Non-rivalry in consumption In this case, an additional person consuming or receivng the alert does not diminish the information available to the others in the vicinity. Hence it can be considered as non-rivalry in consumption. The characteristic of non-rivalry in consumption shows that the marginal cost of provision of public goods to an additional user is zero. This is because once the alert system is set up; the government does not incur extra cost in providing one additional person with the broadcast information. When a public good is provided to one person, it is provided to all. Non-excludable in consumption Once the alert is broadcast to the public, it is not possible or is costly to prevent non-payers from receiving the flood warning/alert. Due to the characteristic of non-excludability in consumption of public goods, this leads to the problem of free ridership here where individuals do not want to reflect their wants in the market system. Hence leading to zero production resulting in complete market failure. Hence the government has to provide for the flash flood alert system. Conclusion The flash flood alert system has the characteristics of non-rivalry and non-excludability, hence it is better placed in the category of public goods. (b) Introduction In a mixed economy, governments intervention in the markets for goods and services extends beyong the provision of public goods. Government often needs to intervene to achieve a more efficient allocation of resources. Thus there are instances where the Singapore government attempts to subsidise and impose regulations to induce the market to achieve a socially efficient outcome. Body Explanation of why government intervenes in the provision of public goods Not only is public good non-rivalry and non-excludable, it is also beneficial to the society as it possess large positive externality. The non-rivalry and non-excludable characteristics of public goods make it impossible for a price to be charged for the consumption of public goods. The consumers can free ride on the good. As a result, free market will not allocate resouces for the provision of public goods as no private firms will be willing to supply these goods when they cannot collect revenue for the costs incur in the production of the good or service. Governments intervention is thus required to make sure that such goods are being provided in the market and financed by taxation or other government revenue. Evaluation Yes, government should provide, but in what quantities? The government will find it difficult to identify the level of public demand for the public good such as the flood alert system without a price mechanism. Highlight that governments intervention in resource allocation in markets includes goods that exhibit externalities (including merit and demerit goods). Externalities Price mechanism does not take into account external cost or benefit. Consumers and producers, concerned only with self-interest, will ignore the third party effects. As a result, there is either an over consumption/production (for goods and services with external cost) or under consumption/production (for goods or services with external benefit). These create deadweight loss to society indicating that resources are not allocated efficiently in the market as desired by the society as a whole. Taxation, regulations, subsidies can be used to correct this aspect of market failure. Merit and Demerit Goods Merit goods and demerit goods arise due to the divergence between the values of society and the values of individuals. The divergence in value is usually because of unawareness of the full benefits or costs to the consumers or producers. Such goods can be provided by the private producers/consumers as they are excludable, but private producers/consumers either do not provide or consume sufficient quantities or produce/consume too much. Same policies used for externalities apply for this category of goods. Evaluation Government may create inefficiencies when they intervene in markets due to imperfect information, costs of administration and enforement and electoral pressurest etc†¦(government failure). Conclusion Government’s economic activity should not be restricted to the provision of public goods. They need to also intervene via various policies to address other forms of market failures present in the economy. However, government intervention may not necessarily lead to a more efficient outcome due to possible government failures. 6) 2009 YJC H1 Prelim a) Explain the economic indicators which may be used to indicate the health of an economy. [10] (b) To what extent is GDP a good measurement of standard of living in Singapore? [15] Part (a) †¢ Define ‘health’ of an economy. †¢ Link to macroeconomic goals of government: stable price level/low inflation rate, full employment/low unemployment, Balance of Payments equilibrium and stable exchange rate, high and st able economic growth. †¢ Explain (not just state) what indicators can be used to measure health of the economy. economic growth figures unemployment rate inflation rate Balance of Payments Conclusion: Health of an economy is multi-faceted, should not be too hasty in concluding that economy is in poor health on basis of one indicator alone. Even though the judgment of the health is based on the above 4 indicators, there exists other indicators which could further improve that judgment. |Knowledge, Application, Understanding and Analysis | |Level 3 |Clear explanation of the 4 economic indicators with links to health of the economy. indicators clearly | | |explained ( max 7m | |Level 2 |Underdeveloped explanation eg an explanation of each economic indicator but not its interpretation/link to | | |health of economy. | | |OR | | |Explanation of only two indicators with link to health of economy. |Level 1 |For an answer which has some basic correct facts such as unexplained defin itions of economic growth, inflation| | |rate, unemployment rate and BOP. | Part (b) 1. Intro †¢ Define GDP: Measures the value of final goods and services produced within the geographical boundaries of the country in a year. The production process may either make use of the factors of production owned by the citizens of the country or involve the factors of production owned by foreigners †¢ GDP can be used as an indicator of economic performance and standard of living. . Body Thesis: Data is generally sufficient as a rough proxy †¢ Economic growth of a country can be roughly approximated by the % change in GDP to estimate the rise in output and income > proxy for living standards Anti-Thesis: However there are better indicators than GDP †¢ Needs to consider real GDP versus nominal GDP. Nominal GDP could have risen but general price levels could have risen at a faster rate and thus eroding the real purchasing power of the individual and living standards in the ec onomy. To obtain real national income, money national income (expressed in current prices of each year) must be adjusted to constant prices of a chosen base year. †¢ Needs an indicator of population growth to determine per capita income > otherwise, if population has grown by more than GDP growth, than on average, each person will see a fall in his living standards > better indicator to be GDP per capita †¢ Needs an indicator of income inequality (Gini coefficient) > otherwise, there is a rise in GDP growth for the whole country, but this rise in incomes is not enjoyed equally by all. GNP could be a more accurate indicator as it includes net factor income from abroad. Especially in view of Sporeans working overseas and Spore firms who are based overseas > need to include remittances from overseas to get true gauge of economic performance and SOL of the Spore Anti-Thesis 2: Need to consider other indicators (macroeconomic aims) to provide broad overview of economic performance in S pore †¢ Govt could be concerned with other macro performance like UN+ rate, inflation rates and external performance of Spore †¢ UN+ rate †¢ Inflation rate measured generally by % change in CPI in Spore. External performance to be indicated via the status of the BOP (current and capital accounts as well as strength of ER) Anti-Thesis 3: Need also to include the non-material aspect of SOL †¢ Material versus non-material SOL †¢ Human Development Index (HDI) is composed of three components, per capita income and two additional measures – life expectancy at birth and a measure of educational attainment that pools together adult literacy and educational enrolment > better indicator of SOL since it incorporates non-material SOL †¢ Needs to see the quality of life (amenities like access to clean air, sanitation, schools, libraries and museums). For instance, Green GNP is the informal name given to national income measures that are adjusted for the depletion of natural resources (both renewable and non-renewable) and degradation of the environment. The types of adjustments made to standard GNP would include the use cost of exploiting a natural resource and valuing the social cost of pollution emissions. Damages to the global environment such as global warming, depletion of the ozone layer should also be deducted but these damages are hard to estimate. . Conclusion The GDP is generally used as a rough proxy of economic performance and living standards of Spore citizens. However it does have its limitations and one will need to take care when interpreting its results. End Suggested Answers and Mark Schemes Qty of fuel Price of fuel 0 S1 S2 D1 Q1 Q2 P2 P1 A B Fig. 1 Qty of holiday packages Price of holiday packages 0 S3 S4 D3 Q3 Q4 P4 P3 E F Fig. 2