ACJC H2 Prelim 2024 P2 EQ2 Solutions

a) Explainwhyagovernment mayneedtointerveneinthemarket for skillstraining. [10] QuestionAnalysisfor part (a)Focus(F): Provideexplanationtoillustratehowcanskillstrainingcausepositiveexternalitiesinconsumptionandimperfectinformationinconsumption&thuscausemarketfailureSkill (S): “Explain”requireseconomicreasoning,analysisanddiagrammaticillustrationofhowskillstrainingscauseresourcestobeallocatedundesirablyandthuswelfarelosstosociety.Context(C): SkillsTrainingmarket,nospecificcountry Suggestedanswer for part (a)1. Introduction:identifythesourcesofmarketfailureandunpackkeytermsinquestion ● Marketfailureoccurswhenthepricemechanism,operatingwithoutanygovernment intervention, failstoallocatescarceresourcesefficientlytomaximise society’s welfare. Market failuresprovideoneof themajorjustificationsforgovernmentinterventionintheeconomy.● Sourceofmarketfailureforskillstrainingso Positiveexternalitiesinconsumptiono Imperfect informationinconsumption 2a. Body:Explain positiveexternalities Explain thedivergencebetweenprivatebenefits andsocialbenefits. Positiveexternalitiesinconsumption● Positiveexternalitiesarisewhentheproductionorconsumptionofagoodgeneratesbenefitstoathirdpartynot involvedintheproductionandconsumptionofthegood,andthethirdpartydoesnotpayforthebenefitenjoyed.● Inthecaseof theconsumptionofskillstrainings,itgeneratedpositiveexternalitiesinconsumption. Onceaconsumer(labour)istrained, hewouldpossessspecificskillslearntfromthetrainings.Others,suchasfirms(3 rd parties)whoemployedthetrainedlabourwillthusbenefitfromimprovementinthefirm’sproductivity,(e.g.producingmoreoutputswithsamenumberofemployees). ● Asmarketdecisionsmadebyeconomicagentsareguidedbythepursuitof self-interest. Indecidingwhethertobepursueskillstrainings,andconsumer(labour)will onlytakeintoaccounthisprivatemarginalcost(MPC)andprivatemarginalbenefit(MPB).● MPB:Additionalgaininwagesearnedasaskilledlabour● MPC:Additionalcostincludestimespentinone’spursueofskillstraining,ortheskillstrainingcourse/workshopfee 2 Introducedin2015,allSingaporeansaged25yearsandabovereceivedanopeningcredit of $500intheirSkillsFutureaccount.Singaporeanscanmakeuseofthesecreditstodeepenexistingskillsorreskillintonewareasoutsideoftheircurrentfield. Source:SkillsFuturewebsite (a) Explainwhyagovernment mayneedtointerveneinthemarket forskillstraining. [10] (b) Discusswhethertheprovisionofsubsidiesisthebestpolicytoaddressthemarketfailureintheskillstrainingmarket. [15]

Aswellasthemarketequilibrium Explainunder-allocationofresourcesincomparingthemarketequilibriumtothesocialoptimaloutcome. ● Basedonthepricemechanism, themarket equilibriumlevel of skillstrainingconsumediswheremarginalprivatecost(MPC)equatestothemarginalprivatebenefit(MPB),(I.e.MPB=MPC).marketequilibriumoutput,Qm. ● However, this consumer (labour) would not consider the positiveexternalitiesthatcouldbegeneratedfromhisskillstrainingonthethirdparties. Inthiscase,consumer(labour)whoarewentforskillstrainingwill createamoreproductivityworkingenvironment intheworkplace,firmsmaybenefit frommorehighproduction, orbetter-qualitygoods/services produced, eventuallyraisingtheprofit marginfor firms. Themoreconsumers(labour)whoattendedskillstrainings, thehigherthechancesof thirdparties(suchasfirms)benefittingfromhigherlabourproductivity.(I.e.themarginalexternalbenefits,MEB>0).● Hence,thereisadivergencebetweenthemarginalsocialbenefit,MSBandmarginalprivatebenefit,MPB,whereMSBliesabovethatofMPB.This is so as societal benefits account for the private benefitsandexternalbenefits(I.e.MSB=MPB+MEB)andsinceMEB>0,thusMSB>MPB. ● Assuming that thereisnoexternal cost intheconsumptionof skillstrainings,MPCthusequatestoMSC(i.e.MPC=MSC).● As such, at the market equilibriumQm, society values the skillstrainings more than what it would cost to society. (I.e. at 0Qm, MSB>MSC).Thus, at market equilibrium, resourcesarenot allocatedefficientlytoachievethesociallyefficient levelwhichshouldbeat0OswhereMSBequatestoMSC(I.e.MSC=MSB). ● Bypricemechanism,thustherewillbeunder-allocatesofresourcesintothemarketofskillstrainingi.e.toolittleskillstrainingsattendedwhenleftbymarkettoallocateresources.● Thereisanunder-consumptionofskillstrainingsresultinginthewelfareto society not being maximized. Society could have gain welfareequivalenttoareaEmEsA(shadedarea)iftheyincreasequantityofskillstrainingsattendedtoQs.Therefore,governmentinterventionisjustifiedin2

the case skills trainings to increase the consumptiontothesociallyoptimumlevelofoutput(i.e.0Qs). 2b. Body:Explainimperfectinformation Imperfect information● Inthiscase,consumers(labours)maybe unaware of the truebenefitstothemselvesshouldtheyopttoattendskillstraining.o Thiscouldbebecausetheyhaveinsufficient informationonthebenefits of attendingsskillstrainingsandsomadeinaccuratedecision. For instance, theymaynot beawaretheadditionalamount of wageincrement onemayget afterundergoingskillstrainingorthelikelihoodofpromotion.o Thus, Consumers (labours) underestimated the actual privatebenefitstothemselves.● Hence, theconsumer’sperceivedbenefitsofskillstrainingbeinglowerthantheactualbenefits.(MPBperceived<MPBactual)● ThemarketequilibriumconsumptionlevelisthereforeatQM whereMPB(perceived)=MPC,whiletheallocativeefficientconsumptionlevelisatQAE whereMPB(actual)=MPC.● Hence, asQM islower thanQAE (theallocativeefficient consumptionlevel), thereisapotentialwelfaregainofareaAEsEmifconsumptionwasincreasedbyQM QAE .● Therefore,thereisanunderconsumptionofskillstrainingconsumedbyQM QAE 3. Conclusion: ● Societyasawholecouldbemadebetteroffifmorelabourattendskillstraining to the allocative efficient level, QAE . Thus, there is underconsumption of skills trainings due to the presence of positiveexternalities and imperfect information, government intervention isjustifiedtointervenetoensureresourcesallocateddesirably. 3

Markingschemefor Q2aKnowledge, Application, UnderstandingandAnalysisL3 ● For aclear &thoroughexplanationof howskillstrainingcausesmarketfailurebyrelatingtopositiveexternalities(inconsumption)andimperfectinformation(inconsumption).● Gooduseof diagrams. (encouragedtodrawforbothsourcesof marketfailurerespectively)● Contextuallyaccurateandfocusedwithsoundapplicationtoskillstrainingmarket.● Answerissupportedwithacohesivediagrammaticanalysis. 8-10 L2 ● Forananswerthatshowsunderstandingofmarketfailureandanapplicationoftheorytoexplainwhymarketfailsbutinsufficientlydeveloped● Only 1 economic justification explained (either positive externality orimperfectinformation).● someaccuratereferencetothecontextofskillstrainingmarket● Answer may be supported with diagram but limited explanation andreferencetoit. 5-7 L1 ● Forananswerthatshowsdescriptiveknowledgeofmarketfailureinrelationto positiveexternalities/ imperfect informationor answer withconceptualerrors.● Answerhasincidental/noreferencetothecontextofskillstraining. 1-4 4

b) Discusswhether theprovisionof subsidiesisthebest policytoaddressthemarketfailureintheskillstrainingmarket. [15] QuestionAnalysisfor part (b)Focus(F): Acomparisonofsubsidisingskillstrainingstootherpolicesonwhetheritisthebestformofgovtinterventiontodealwiththevariouscausesofmarketfailurearisingfromthemarketofskillstrainings.Skill(S): “Discuss”requiresabalancedargumentandareasonedjudgementContext(C): Skillstrainingmarket Suggestedanswer for part (b)1. Introduction:IdentifytheissueandpossiblegovernmentmeasuresExplainthepurposeofgovernmentintervention. ● Issue:under-consumptionofskillstraininginfreemarketduetoo Highexternal benefit generatedintheconsumptionof skillstraining–positiveexternalityinconsumptiono Imperfectinformation-insufficientandinaccurateinformation● Possiblegovernmentintervention:o subsidyo publiceducation● Purpose of government intervention: resource allocation to beallocativeefficienttosociety Subsidyisaformof government interventionduetothehighexternalbenefittosocietyandimperfectinformationwhichwillcauseskillstrainingto be under-consumed. Throughgovernment intervention, governmenthopes to reduce imperfect informationandunder-consumptionduetoig