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 intheworkpla