ACJC H2 Prelim 2024 P1 CSQ1 Solutions

2024H2Paper 1Question1: SuggestedMarkScheme (a) Compare the changeinthecost of energyfromfossil fuelswiththechangeincost ofenergyfromsolar power between2018to2022. [2] General trend:Thecostoffossilfuelswasincreasingwhilethecostofsolarpowerwasdecreasing.[1] Refinement:Thecostoffossilfuelschangedbyalargerextentofabout300%increasecomparedtothechangeincostofsolarpower.[1] Not accepted:- Both decreased from2018 to 2020 – this does not cover the entire time period of2018to2022.- 0 marks if no explicit comparison made and student describe each changeseparately. (b) With the aid of diagrams, explain how the developments in renewable energy mayaffect themarketsfor renewableenergyandenergyfromfossil fuels. [4] Explainthechangesintherenewableenergymarket: [2]- Withanincreaseintechnologyandeconomiesof scale, cost of productionisfalling. Firmsaremorewillingandabletoproduce, resultinginanincreaseinsupplyofrenewableenergy.- Theincreaseinsupplyresultsinasurplusanddownwardpressureonprice,decreasingthepriceofrenewableenergy.- Atthenewmarketequilibrium,pricehasdecreased,andquantityhasincreased. Explainthechangesinthefossil fuelsenergymarket: [2]- Renewableenergyisasubstituteforenergyfromfossilfuels.Astherenewableenergy becomes relatively cheaper, consumers switch away fromconsumingenergyfromfossilfuels,resultinginadecreaseindemandforenergyfromfossilfuels.- Asdemanddecreases,thereisasurplusanddownwardpressureonprice.- Atthenewmarketequilibrium,pricehasincreased,andquantityhasdecreased.

Markers’ notes: Awardonly1markfor eachmarket if thereareanykeywords(underlined)missingor if thereareanyerrorsinthediagram. (c) (i) Explain how the development of ‘Long Island’ will reduce the opportunity costof buildingnewhomes. [2] Opportunitycostisthevalueofthenextbestalternativeforgonewhenachoiceismade.[1] WiththereclamationoflandforLongIsland,thereismorelandavailableforusessuchasbuildingnewhomesandrecreation.Withmorelandavailable,thereisalesserneedtoforgoalternativeuseswhenthelandisusedtobuildnewhomes,resultinginaloweropportunitycostincurred.[1] Markers’ notes: Award one mark for theexplanationof opportunitycost. Exact definitionisnot required as long as the meaning comes across. Award the second mark if studentshow’stheunderstandingthat moreavailablelandreducesopportunitycost. (ii) Explain why coastal protection measures such as ‘Long Island’ must beprovidedbythegovernment. [4] Coastalprotectionmeasuresarenon-rival:[2]- Coastal protection measures are non-rival because theuseof theprotectionmeasurebyoneindividualdoesnotdiminishthequalityorquantityofprotectionenjoyedbyanotherindividualatthesametime.ManyhouseholdslivingwithintheproximityofLongIslandcanenjoythebenefitsofcoastalprotectionatthesametime.- Assuch, themarginalcost(MC)ofprovidingcoastalprotectionmeasurestoanadditionalhouseholdiszero.Thus,theconditionforallocativeefficiencyisP=MC=0.- ProfitmaximisingfirmswillchoosetopriceatP>MC,thereforeresultinginwelfarelosstosociety. Coastalprotectionmeasuresarenon-excludable:[2]- Coastal protectionmeasuresarenon-excludableasonceitisprovided,itisnoteconomicallyfeasibletoexcludeanon-payerfromenjoyingthebenefitsofcoastalprotection.- This results in a problemof free ridership where consumers would wait forsomeoneelsetopayforthegoodandenjoythebenefitsforfree. Thus,therewouldbenodemandforthecoastalprotectionmeasures.

- Withoutdemand,therearenopricesignals,anditwouldnotbeprofitableforfirmstoproducethegoodandtherewouldbeamissingmarket. Sincecoastalprotectionmeasuresareapublicgood,theymustbeprovidedforbythegovernment. Marker’snotes: Minus1mfor eachcharacteristicif anykeywordsaremissing. (d) Discusswhether thebenefitsof acarbontaxoutweighthecoststosociety. [8] Introduction:- Briefexplanationofnegativeexternalitiesfromcarbonemissions- Statepolicyobjective:acarbontaxisusedtoreducecarbonemissionsandmaximisesocialwelfare. Requirement 1: Carbontaxisbeneficial tosociety Correctionofmarketfailure:- Carbontaxhelpstoaddressnegativeexternalitiesfromcarbonemissions.- AcarbontaxwillincreasetheMPCforfirmsthatemitcarbonintheirproductionofgoodsandservices.- ThegovernmentshouldimposeaperunittaxequivalenttotheMECatthesociallyoptimalquantity.- SuchataxwouldshifttheMPCupwardstoMPCt -- WiththeshiftinMPC,theexternalcostisinternalisedbyfirms.ProfitmaximisingfirmswillnowproduceatMPCt =MPBwithquantityQs - Thusthesociallyoptimalquantityisachieved.SinceMSC=MSBatthisquantity,thewelfarelossiseliminated,andsocialwelfareismaximised.Societybenefitsfromtheimposingofacarbontax. EvaluationofR1:- Theextentofthisbenefittosocietydependsonthegovernment’sabilitytoimposethecorrectamountoftax.Theexternalcostfromcarbonemissionsisdifficulttoaccuratelyestimate.Thisisduetoitswidespreadimpactonsocietythatisdifficulttotrack.- Ifthegovernmentunderestimatestheamounttotax,therewouldstillbeoverproductionandtherewouldstillbeawelfarelossincurred.Ifthegovernment

overestimatestheamounttotax,thiswouldresultinunderproductionandtherewouldalsobeawelfarelosstosociety. Requirement 2: Carbontaxresultsinacost tosociety Impactonconsumersandbusinesses:- Asmentionedinextract3,consumersandbusinessesmayfeelthepinchofacarbontaxintheformofhigherpricesandcosts.- Forfirms,acarbontaxwouldincreasethecostofproduction,especiallyforfirmsthathavehigherlevelsofcarbonemissions.Thishighercostwoulderodetheirprofitsandreduceproducersurplus.- Asfirmsexperienceanincreaseincostofproduction,firmsarelesswillingandabletoproduce,resultinginafallinsupplyofgoods.Afallinsupplyresultsinashortageandupwardpressureonprices.Consumerswouldthusexperiencehigherpricesofgoodsandservicessuchaselectricity.- Iftheincreaseinpriceisfornecessitiessuchaselectricity,low-incomehouseholdswouldfeelagreaterimpactsincenecessitiestakeupalargerproportionoftheirincome.Ifnecessitiesbecomeunaffordableforsomehouseholdsthisresultsininequityinsociety. Impactontheeconomy:- Extract4alsostatesthatacarbontaxcouldhaveanegativeimpactonthecompetitivenessoftrade-exposedindustries.- Asmentionedabove,taxesresultinhighercostofproductionandpricesofgoodsandservices.Sincefirmsinothercountriesfaceeithernotaxoralowercarbontaxrate,theywouldalsohavealowercostofproductionandbeabletopricetheirgoodslower.- Thus,ifcountrieslikeSingaporeimposeacarbontax,exportsmaybecomelesspricecompetitive,leadingtoalossofexportrevenuewhichcouldharmtheaggregatedemandandlowertheeconomicgrowthintheeconomy.(Note:studentsdonotneedanexcessivelydetailedAD/ASanalysisforthisquestion.) Evaluation:- Criteria1:ShortvsLongTermo Acarbontaxismorecostlyintheshortrun,butleadstomorebenefitstosocietyinthelongrun.Withoutthecarbontax,theproblemofnegativeexternalitiesmaybecomesevereinthelongrun,leadingtohighcostsincurredbysocietyifthesituationisnotaddressed.o However,intheshortrun,itmaybedifficultforfirmstoadapttotheadditionalcostsincurred,leadingtohighercostoflivingandnegativeimpactsontheeconomy.- Criteria2:Government’suseofcomplementarypolicieso Thegovernmentmayuseotherpoliciestomitigatethecostsintheshortrun.Forexample,theycouldprovidesubsidiestohouseholdstocopewiththehighercosts,orgrantstofirmstoinvestintotheuseofcleanerenergyandgreentechnology.o Ifthesepoliciesareimplementedintheshortrun,theoverallbenefitsofimposingacarbontaxarelikelytooutweighthecoststosociety.

Level Descriptors MarksL2 - Answerexplainsbothcostsandbenefitswell- Explanationcontainseconomicanalysisandapplicationtothecontext.- Economicanalysisusedmostlyrelevantandaccurate. 4–6 L1 - Answermayonlyaddresseitherthecostsorbenefitsofacarbontaxtosociety.- Answermaybelackingineconomicanalysisandbemoredescriptiveinnature,withexcessiveliftingfromtheextract.- Economicanalysisusedmaybeirrelevantorcontainmanyinaccuracies. 1–3 E - Asummativeconclusionisprovidedwithclearcriteriaandreasoningfortheoverallstand. 1–2 Annotation Level Markout of 8A+CorA+A L2 6C+CorA L2 5C L2 4 (e) Discusswhether firmsshoulduseinnovationor purchasecarboncreditswhenfacedwithanincreaseincarbontax. [10] Introduction:- FirmsareassumedtobeprofitmaximisingandproduceattheoutputlevelwhereMC=MRtomaximiseprofits.- Anincreaseincarbontaxincreasesthemargina