HCI H2 Prelim 2024 Paper 2 Mark Scheme

Question 1 Museums are important cultural institutions that enrich communities and benefit even non-visitors. They often rely on government subsidies to keep ticket prices affordable to as many segments of society as possible. However, as some museums prosper and attract large crowds, there is growing debate over reducing subsidies to reallocate funds elsewhere. a) Explain why museums are not public goods but the government considers it necessary to intervene in the market for museums. (10) b) Discuss whether reducing subsidies for museums is justified. (15) a) R1: Explain why museums are not public goods. Public goods refer to goods which are non-excludable and non-rival. The points here can be embedded into direct application of how museums are excludable and rival. • Non-excludability in consumption refers to the situation where the consumption or use of the good or service cannot be limited to the consumers who have paid for it. The reason is due to the lack of private property rights over its use because it is impossible or prohibitively expensive to exclude non-payers from consuming it. • Non-rivalry in consumption refers to the situation where the consumption or use of the good or service by one consumer does not reduce its availability to another consumer. Museums are not public goods because they are excludable and museum visitor space is rival when crowded. • Museums are excludable as they can easily have ticket attendants at the entrances to check if visitors have purchased tickets for entry. Those who have not purchased tickets are rejected from entering the museum. This prevents free riders from entering the museum. • Viewing of the exhibits within a museum are non-rival when it is not crowded. A person viewing the exhibit does not diminish the viewing pleasure of another person viewing the exhibit next to him/her. However, once the museum becomes crowded then rivalry may set in due to limited space, as a person viewing the exhibit may block others from viewing the exhibit clearly.

R2: Explain that the government intervenes due to the presence of positive externalities. The government intervenes due to the presence of positive externalities in museum consumption. Figure.7¿ .Positive.externalities.in.museum.consumption • With reference to Fig 1, the Marginal Private Cost (MPC) refers to the costs incurred by museums for each additional visitor, such as maintenance, staffing, and exhibit upkeep. The Marginal Private Benefit (MPB) reflects the personal enjoyment or educational value that visitors gain from attending the museum. • However, there is often a divergence between private and social benefits due to the external benefits generated by museum visits. Museums provide significant external benefits to third parties beyond the visitors themselves, such as local communities, businesses, and future generations. For example, museums help preserve cultural heritage, which benefits future generations by ensuring access to historical and cultural knowledge. Local businesses may benefit from increased tourism generated by museum attractions, and educational institutions can leverage museums as resources for learning purposes. These external benefits are not reflected in the MPB. As shown in Figure 1, this results in a divergence between private and social benefits, with the Marginal Social Benefit (MSB) curve lying above the MPB as MSC = (MPB + MEB)

• In a free market, MPC = MPB results in an equilibrium quantity of Qm. However, the socially efficient quantity is at Qs, where MSC = MSB. Given that Qm is lower than Qs, there is an underconsumption of museum visits. • Between Qs – Qm, area QmQSBC represents the total social benefits that could be gained by increasing museum consumption to the socially optimal level, while QmQSBA represents the total social cost of doing so. Since the total social benefits exceed the total social costs between Qs and Qm, there is a deadweight welfare loss of area ABC loss due to the under-consumption of museum visits. Marking Scheme: Level Descriptors Marks L3 Breadth & Application • R1: Explain how museums are excludable and how museums can be rival if crowded. • R2: Explain the existence of DWL from positive externalities in the market for museum visits. Depth • Applies relevant economic concepts or theories • Explains with rigour and detail • Explains and illustrates with relevant diagram(s) and example(s) relevant to preamble given 8-10 L2 • Lacking in any one of the L3 criterions 5-7 L1 • Largely irrelevant response • Descriptive response with non-existent or minimal or application of economic concepts or theories • Serious and pervasive conceptual errors 1-4 b) Discuss whether reducing subsidies for museums is justified. (15) R1: Reduction of subsidies are justified as some museums may have over -subsidy.

Reduction of spending would be justified if the government is over-subsidising museums. • The appropriate amount of subsidy would be MEB at Qs. A subsidy higher than that amount would mean that museums are being oversubsidised. • With reference to fig 2, an over-subsidy would lead to MPC shifting to MPC-Oversubsidy, leading to Q1 and P1. Q1 exceeds the socially optimal output Qs, implying overconsumption. • This results in a deadweight loss of area ABC as between Q1 and Qs, the total social costs exceed the total social benefits. • Reduction of subsidies will shift MPC – oversubsidy to MPC – subsidy, leading to a new equilibrium of Qs and Pm’ , and eliminating the DWL from oversubsidy. Diagram, clear explanation and labelling of DWL from oversubsidy, and how reduction of subsidies allows it to reach Qs is needed to get an “A” EV1: The fact that some museums can prosper and attract large crowds indicate that their demand/MPB is quite high. This suggests that the extent of underconsumption or the gap between MSB and MPB (MEB) is quite low. And thus, reduction of subsidies is justified. Figure.8¿ .Reduction.of.oversubsidy

Requirement 2: Reduction of subsidies are not justified it may lead to underconsumption • The appropriate amount of subsidy would be MEB at Qs. A subsidy lower than that amount would mean that museums are being undersubsidised. • With reference to fig 3, reduction of subsidies will lead to MPC shifting from MPC- subsidy to MPC-undersubsidy. This will shift the equilibrium from Qs to Q1, where there is still underconsumption as Qs exceeds Q1. • From Qs to Q1 total social benefits exceed total social costs, leading to a DWL of area ABC, which represents the welfare that could have been gained if consumption were increased to Qs. EV2: Reduction is not justified as not every museum is able to draw large crowds. In this case, a reduction of subsidies would lead to under-allocation of resources. For example, the Asian Civilisations Museum in Singapore is fully subsidized for Singaporean residents to ensure the socially optimal levels of consumption. Reduction of subsidies in this case will not be justified. Figure.9¿ .Reduction.leading.to.undersubsidy

Alternative R2: Reduction of subsidies is not justified due to inequity • Equity could be defined as fairness in the distribution of economic welfare. • This applies mainly to essential goods where it could be deemed unfair for anyone to be denied the goods just because they cannot afford it. • What is deemed an essential good is however normative , depending on the value judgements of different societies. It can be argued that museums are essential goods that allow consumers to access cultural and historical education that would be difficult to replicate in other settings. Show.either.dd― ss.or.social.welfare.diagram.whereby.reduction.of.subsidies.increases.the. price.of.museum.visits― tickets¡. • As shown in the above figure, reduction of subsidies increases the price of museum admissi