NJC H2 Prelim 2024 Suggested Answers

© NJC 2024 9570/01/Sep/24 NJC 2024 SH2 H2 Econs P1 Suggested Answers Case Study Question 1 Suggested Answers (a) With reference to Extract 1, explain the reason for the large increase in consumption for animal -based proteins in developing countries. [2] ● When there is economic growth, households have higher income, thus resulting in an increase in demand for normal goods. [1] ● In developing countries where incomes are low, animal-based proteins are considered luxury goods. Therefore, there is a significant increase in demand for animal -based proteins. [1] (b) With reference to Extract 2, explain why there is “a downward trend in meat -eating but figures are still high” (Extract 2). [4] ● “The recent development of plant -based meat” (Extract 2) led to a decrease in the prices of plant-based meat. [1] ● Plant-based meat is considered substitute in consumption to meat. [1] ● When prices of plant-based meat decrease, there is a decrease in demand for meat, hence explaining the downward trend. [1] ● Nevertheless, “the figures are still high” because there is a lack of / weak public support (Extract 2) due to “cultural habits” (Extract 2), thus the decrease in demand is insignificant. [1] (c) With reference to Extract 3, (i) and using a demand and supply diagram, explain how the Environmental Land Management Schemes (ELMS) boost UK farmers’ income as a result of doing the right thing for the environment. [4] ● “Do the right thing for the environment, for example looking after hedgerows, grasslands and soils / large- scale rewilding projects / natural flood management, wetland restoration and enhancing forest (Extract 3), would increase the cost of food production to UK’s farmers. The increase in cost of production would reduce the income of UK’s farmer. [1] ● Government payments via the ELMS help lower the cost of food production when the farmers adhere to the higher environmental standards. This would increase the production of food as illustrated by the shift of the supply curve from So to S1 in Diagram 2. [1]

Diagram 1: The market for farmed goods ● As a result, no doubt UK’s farmer pre- subsidy revenue decreases from area P0E0Q00 to area P 1E1Q10, UK’s farmer post -subsidy revenue increases from area P 0E0Q00 to area (P1E1Q10 + P0E0AP2). [1] ● A well-labelled and well-referred to diagram. [1] (ii) explain the unintended consequence of UK’s higher environment standards in food production on its economy. [2] ● UK’s higher environment standards in food production would increase the cost of food production to UK’s farmers and the farmers would pass on the higher costs in terms of higher prices to consumers. [1] ● UK’s consumers would thus switch from purchasing the relatively more expensive domestically produced food to the relatively cheaper imported food thus increasing UK’s import expenditure (M) and hence decreases UK’s (X-M). [1] (d) With reference to the information provided, discuss the view that providing information would reduce allocative inefficiency caused by imperfect information on “the demand side” (Extract 4) of UK’s food systems. [8] ● The existence of imperfect information regarding the health costs arising from obesity due to meat -eating (Extract 2) has resulted in allocative inefficiency on the demand side of UK’s food system. ● As a result of the imperfect information regarding the heath costs, consumers underestimated their private cost of meat-eating. For example, obesity and its related health issues that would require expensive medical treatments. ● The existence of the imperfect information thus results in a divergence between MPCperceived and MPCactual as illustrated in Diagram 2 where MPCactual > MPCperceived.

© NJC 2024 9570/01/Sep/24 Diagram 2: Costs and benefits of meat-eating from consumers perspective ● The free-market equilibrium level of consumption is at Qp where MPCperceived=MPB but the socially optimal level of consumption is at Q a where MPCactual=MPB. The latter assumed the inexistence of externalities thus MPC=MSC because MEC=0 and MPB=MSB because MEB=0. ● Since Qa<Qp, there is an over-consumption of meat by QaQp. ● The over-consumption results in allocative inefficiency illustrated by a deadweight loss of triangle EaEpA. ● Information providing regarding the true full costs of meat-eating (e.g. health costs such as obesity and its related health issues that would require expensive medical treatments), if successful, will change consumers’ taste and preferences away from eating meat (i.e. decrease in demand for meat) and towards more plant -based alternatives because of the increase in their marginal private cost of meat -eating as illustrated by the shift of MPCperceived closer to MPCactual. ● As a result, meat -eating would reduce from Q p towards Q a, decreasing the over - consumption thus reducing the deadweight loss. Therefore, information providing can be used to reduce allocative inefficiency caused by imperfect information on the demand side of UK’s food systems. ● In conclusion, whether information providing would reduce the allocative inefficiency caused by imperfect information on the demand side of UK’s food system depends on the nature of information provided. ● Information must be targeted at how meat -eating would impact the individuals themselves (e.g. health costs arising from obesity) to be effective (also suggested in Extract 4 Paragraph 5). (e) With reference to the information provided, discuss whether a reduction in subsidies given to high - emission food production should be implemented by the UK government to address the market failure on “the supply side” (Extract 4) of UK’s food systems. [10] ● No doubt the reduction in subsidies given to high -emission food production can address the market failure on the supply side of UK’s food system, it will bring about unintended consequences.

● Whether the UK should reduce the subsides on high -emission food depends on whether the subsidies can be reoriented to low -emission food production to minimise the unintended consequences. ● Negative production externalities in the case of, for example meat (i.e. animal -based proteins) production, are spill over costs associated with meat production to third parties who are not directly involved in the production nor consumption of meat, and no compensation is involved. ● Meat production have private benefits to firms such the revenue earned from the sale of meat and private costs to firms such as wage expenditure to process / transport the meat and the expenditure on animal feeds. ● However, meat production also has external costs to third parties such as vegetarian rising from health-related illnesses (and their treatments) associated with greenhouse gas emissions (Extract 1) such as heat stress and elevated blood pressure ● Meat is often over -produced resulting in deadweight