2024 NJC Prelims H1 Econs (A)

© NJC 2024 9570/01/Sep/24 NJC 2024 SH2 H1 Econs P1 Suggested Answers Case Study Question 1 Suggested Answers (a) With reference to Extract 1 and using Price Elasticity of Demand (PED), explain the impact on consumers’ food expenditure as a result of the climate change. [4] • Climate change has destroyed food crops. Thus, the supply of food has decreased. [1] • The decrease in supply of food would cause an increase in the price of food. [1] • Food has high degree of necessity. Therefore, |PED| < 1. [1] • Given |PED| < 1, the increase in price of food would cause an increase in consumer expenditure on food. [1] (b) With reference to Extract 1, explain the reason for the increase in consumption for animal - based proteins in developing countries. [2] • In developing countries, animal-based proteins are considered normal goods. [1] • When there is economic growth, households have higher income thus there is an increase in demand for animal-based proteins. [1] (c) 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] (d) 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 2: The market for farmed goods • As a result, no doubt UK’s farmer pre -subsidy revenue decreases from area P0E0Q00 to area P1E1Q10, UK’s farmer post-subsidy revenue increases from area P0E0Q00 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] (e) Using a demand and supply diagram, explain and comment on the likely effects of the decrease in demand for meat (Extract 2) and the subsidies for livestock farming (Extract 4) on the quantity of meat transacted in UK. [6] • The subsidies for livestock farming in UK would reduce the cost of production for UK’s livestock farmers and thus increase the supply of livestock in UK. • Given that the “UK government spends at least £1.5b a year subsidising livestock farming”, the increase in supply due to the subsidies is large. • The large increase in supply of livestock would put a large downward pressure on the price of livestock in UK. • The significantly lower price of livestock would significantly lower the cost of meat production in UK and thus lead to a large increase in the supply of meat in UK’s meat market as illustrated by a large shift of the supply curve from S0 to S1 in Diagram 2. • A well-labelled and well-referred to diagram. • As explained in (c), the demand for meat in UK has decreased but the decrease is small. This is illustrated by a small shift of the demand curve from D0 to D1.

© NJC 2024 9570/01/Sep/24 • Given the increase in supply is larger than the decrease in demand, quantity transacted of meat in UK would increase. (f) 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. 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 MPC actual=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 redu