EJC Econs N2019 H2 Paper 1 Suggested Ans and Mark Scheme

Suggested Answers for H2 N2019 CSQ1: Market Failures in the Vietnamese energy market (a) With reference to Extract 1, identify a demand factor and explain how it has affected demand for coal in the US. [2] • Demand factor: Cheaper substitute such as cleaner gas produced using fracking. • A fall in the price of cleaner gas which is a substitute for coal as an alternative source of energy, will cause profit-driven US firms to increase the quantity demanded for cleaner gas and switch away from coal. Thus, the demand for coal falls. [1] (b) Using the evidence in Extract 1, explain whether the cross elasticity of demand in China between coal and renewable energy is positive or negative. [3] • As coal and renewable energy are substitutes in demand (to produce energy). [1], the cross elasticity of demand (XED) between coal and renewable energy is positive. [1] • Evidence: From Extract 1, an enormous investment in renewable energy would lead to a large increase in the supply of renewable energy which would cause a fall in the price of renewable energy. Hence a fall in price of renewable energy would lead to a fall in demand for coal in China. [1] (c) Using a diagram and Extract 1, explain how the UK government’s change in the minimum price of coal in 2016 is likely to have affected the UK market for coal. [3] • Imposing a minimum price at P min1 would result in a surplus of Q dd1Qss1 in the market for coal.

• When there is an increase in the minimum price of coal in 2016 from Pmin1 to Pmin2 , it would increase the size of the surplus, where the larger surplus resulted from Qdd1Qss1 to Qdd2Qss2 in the market for coal [1] • Higher price of coal from Pmin1 to Pmin2 • Assuming |PED|>1 for coal (availability of substitutes), there will be more than proportionate fall in transacted quantity of coal from Q dd1 to Qdd2. Overall, TR falls as seen by a great er fall in revenue of Area A as opposed to gain in revenue in Area B. [1] • Diagram [1] (d) With the help of a diagram, explain how a rise in the demand for coal in Vietnam is likely to affect its social welfare. [4] • Coal consumption g enerates negative externalities which exists when there are costs borne by third parties due to the consumption of a good or service. [1] • MEC to 3rd parties: Higher healthcare cost to local residents and fishing industry workers from waste generated from coal power plants (Extract 3) are not compensated for the damage done to their health [1] • There is an over -consumption of coal by Q p1Qs. For every trip beyond Qs till Qm, each additional coal consumed adds more to social cost than to social benefits since MSC is greater than MSB. This forgone societal welfare is the deadweight loss (area EsAEp1), leading to allocative inefficiency. • Further increase in demand will shift MPB to the right from MPB1 to MPB2, worsening allocative inefficiency a