EJC Econs 2022 A-Level H2 P1 Q2

Suggested Answers for 2022 A-Level H2 P1 Qn 2 (a) Distinguish between a rise in total output and a rise in productivity. [2] A rise in total output refers to an increase in the amount of goods and services produced but a rise in productivity refers to an increase in goods and services produced per unit of resource in a given time period. (b) Explain one reason why a firm with significant market power and long-run excess profits might choose to spend large sums on research and development (R&D). [2] • According to Extract 6, Volkswagen is investing heavily on battery-powered technology to become the world leader in battery-powered. With significant market power, a firm with significant market power like Volkswagen enjoys long -run supernormal profits and this enables the firm to carry out R&D. P rocess innovation helps to reduce average costs of production, while product innovation helps to increase demand for its products and also make demand more price inelastic which would raise the firm’s revenue. • Hence, such firms are incentivised to spend on R&D to maintain high barriers to entry to retain its dominant position and make larger or at least maintain its supernormal profits. (c) Explain, with reference to Extract 8, what might be the opportunity cost of the $19 billion invested by the Singapore government to build the country into a global R&D hub. [2] • Opportunity cost refers to the value of the next best alternative forgone. • The opportunity cost of the $19 billion invested by the Singapore government to build the country into a global R&D hub is the increase in real GDP that could be gained by investing the $19 billion on training of local talents or the gain in society welfare by building more hospitals. (d) Explain how the creation of an innovative culture in Singapore is likely to have benefitted the Singapore economy. [6] • The creation of an innovative culture in Singapore is likely to help Singapore achieve sustained economic growth. Sustained growth occurs when an economy’s national output increases over an extended period of time without inflationary pressures. This happe ns when there is both actual growth and potential growth. • An innovative culture would likely bring about greater inflow of foreign direct investment (FDI) as foreign companies deemed Singapore to be more profitable for doing business (Extract 8) as an inn ovation culture allows for more product and process innovation. An increase in FDI would increase the investment expenditure (I) in Singapore hence increasing aggregate demand (AD).

• This results in an unplanned run down of stocks and firms step up on production by hiring more factors of production, including labour. As factor income increases, induced consumption increases as well, causing real national income to increase by multiples from Y1 to Y2. Hence an innovative culture would bring about actual growth and a fall in demand- deficient unemployment as real output increases in Singapore. • Furthermore, a n innovative culture would bring about potential growth for Singapore’s economy. This is because the increase in FDI inflow would increase the quantity and quality of capital in Singapore. There could also be more R&D which can increase productivity level or the state of technology, resulting in an increase in LRAS and an increase in the full employment output level from Yf1 to Yf2 as Singapore’s productive capacity rises. • With actual growth and potential growth achieved, Singapore enjoys sustained economic growth, low unemployment and price stability with the creation of an innovative culture in Singapore. (d) Discuss whether subsidising the purchase of electric cars would improve the efficiency of resource allocation in the market for transport in Singapore. [8] Command Discuss whether Start Point subsidising the purchase of electric cars End Point improve the efficiency of resource allocation Content Market failure, externalities, allocative efficiency, subsidy Context market for transport in Singapore Introduction In the market for transport in Singapore, there is an overconsumption of petrol and diesel vehicle on the road due to negative externalities. Hence subsidising the purchase of electric cars is a possible policy that the government could implement to reduce the consumption of petrol and diesel vehicle. Point 1: There is an overconsumption of petrol and diesel vehicle on the road due to negative externalities • According to Extract 5, emission of nitrogen oxides (NO 2) from car exhaust regularly exceeds safe levels, resulting in heart and lung diseases. The air pollution imposes external costs on households staying near the road as they incurred healthcare costs that are not compensated by the petrol and diesel vehicle owners. B Figure: Market for petrol and diesel vehicle usage MEC QS QP A MPC MSC Quantity C Cost/benefit MPB=MSB

• When a driver uses a petrol and diesel vehicle, he enjoys private benefits in terms of satisfaction due to greater comfort and shorter travelling time. He also incurs private costs such as the price of the vehicle and petrol . To maximum net utility, the driver considers only his private benefits and private costs. This leads to the market equilibrium output QP, where MPB=MPC. • Due to the negative externality in consumption, the social costs of driving petrol and diesel vehicles are higher than the private costs (MSC>MPC). Hence the MSC lies above the MPC by a vertical distance equal to marginal external cost (MEC). Assuming no positive externalities, the marginal private benefits (MPB) is equal to marginal social benefits (MSB). The socially optimal output is given by Q S, determined by the intersection of the MSB with the MSC. • Since Q P>QS, the driver over-consumes petrol and diesel vehicles, leading to an over - allocation of resources. Between Q P and Q S, marginal cost to society is greater than marginal benefit to society. This means that societal welfare could have been improved by reducing quantity of cigarettes consumed to the socially optimal output of QS. This forgone societal welfare is the deadweight loss (area ABC), leading to allocative inefficiency. Point 2: Subsidising the purchase of electric cars could reduce the consumption of petrol and diesel vehicle • According to Extract 5, electric cars are more expensive than their petrol or diesel substitutes. Hence a subsidy for producers of electric cars would reduce the costs of production, increasing the supply of electric cars and resulting in a fall in price of electric cars. Since petrol/diesel vehicles and electric cars are substitutes, with a positive cross elasticity of demand, a fall in price of electric cars would increase the demand for petrol and diesel vehicle. This would shift MPB curve leftward, reducing the consumption of petrol and diesel vehicle from Qp to Qs, thus improving the efficiency of resource allocation in the market for transport in Singapore as the deadweight loss is eliminated. Evaluation/Conclusion • The effectiveness of the subsidy depends on: o The closeness of substitutes (magnitude of XED) between petrol vehicle and electric car in Singapore → the higher the XED value, the more effective the subsidy would be. There might be a lack of charging point in Singapore currently, hence drivers might not see electric cars as a strong substitute to diesel or petrol vehicle. Thus subsidising the purchase of electric cars is likely result in a less than proportionate decrease in consumption of diesel and petrol vehicle . Therefore, efficiency in resource allocation may only improved to a small extent. OR B Figure: Market for petrol and diesel vehicle usage after subsidy on electric cars is given MEC QS QP A MPC MSC Quantity C