ASRJC 2023 H1 Economics A level CSQ 1 answer

H1 2023 CSQ1: Energy Sources Suggested answers (a) With reference to Figure 1, compare the net additions to offshore wind energy capacity in China to those of Germany and the UK over the period 2017 to 2021. (3) China net additions to offshore wind energy capacity overall increase whereas Germany and UK have overall decrease. China’s net additions consistently increased over the period while for Germany and UK, the net addition only went up from 2018 to 2019. In 2021, China has the largest net additions across the period whereas for UK and Germany, they had the smallest net addition across the years. China has the smallest net additions in 2017 as compared to UK and Germany but by 2021, it has the highest net additions. (any 3 points for 3 marks) (b) Explain why renewable energy produced in Singapore is not likely to be a public good. (3)

The renewable energy that Singapore developed is solar energy produced by solar panels. Solar energy produced by Singapore is not a public good because it is excludable in consumption which means that users such as households would have access to such energy only if they pay for it otherwise the energy will not be distributed for their use and solar energy supply can be cut off from their houses. It is also rivalrous in consumption which means that the consumption of one more unit of energy would reduce the amount of energy for others. As stated in the extract, 122,000 solar panels are needed to power 5 water treatment plants. This means that at any point in time there is fixed amount of solar energy produced. If there is an additional unit consumed, there will be less available for others. Alternative: Solar energy is also rivalrous in consumption because when one additional user uses it, it diminishes the quantity of energy that is available for the next user. When solar energy is used to power a household, there will be less solar energy available for another household as the amount of solar energy generated at each point in time is limited by the quantity of solar panel and limited space available to set up the solar panels. Alternative: Consumption is also rejectable. Users can choose not to consume electricity generated by solar power but instead choose to use traditional source of energy. Take note: • Good responses provided clear contextual application of these two characteristics of a public good to renewable solar energy production. • Weaker responses wasted vital time with extended explanations of the characteristics fulfilled by a public good in general. (c) With reference to Extract 2, explain (i) one possible positive externality that could arise from the operation of solar panel energy farm opened in Singapore in July 2021. (2) As stated in extract 2, the solar farm helps to reduce carbon emissions equivalent to 7000 cars. This means producing energy using solar panel generates less air pollution. The positive externality of using solar energy is the cleaner air enjoyed by the rest of the Singapore residents who are third parties not involved in the production and consumption of solar energy produced by the solar farm. Alternative: Another example of positive externality is the improved quality of drinking water, that come from better quality water from the reservoir on which the solar farms are located and this positive externality is enjoyed by the rest of Singapore households drinking the water, who are third parties not involved in the production and consumption of solar energy. (ii) why energy produced in the Singapore solar farm would be under- consumed in a free market. (3) In a free market, producers and consumers only consider their private costs and private benefits. They maximized their welfare by consuming and producing at the market equilibrium output at Qo where MPC=MPB. Due to the presence of positive externalities as explained above, marginal social

Q0 benefit (MPB + MEB) is greater than MPB. From society’s point of view, the socially optimal output is Qs where MSC=MSB which is less than Qo. So there is under-consumption of the good by QoQs where the MSB is greater than MSC for the units between Qo and Qs. This leads to a deadweight loss of area ABC as each additional unit generates more benefits than costs. [insert diagram] Note: Drop step 3 in the 5-step market failure explanation. Step 3 is already explained in the earlier part. Recap 5 step market failure explanation Step 1: explain MPB, MPC with e.g. Step 2: explain free market equilibrium Step 3: Explain externality Step 4: explain where is socially optimal output Step 5: under/over production/consumption and deadweight loss (d) With reference to Extract 3, explain the likely impact on consumers’ energy expenditure as a result of the price increase authorized by Ofgem in August 2021. (5) Consumers’ expenditure is price x quantity demanded. The demand for energy is price inelastic of between 0.1 and 0.3 as mentioned in Extract 3. When price increase, quantity demanded will fall by less than proportionately. The increase in expenditure due to the price increment is greater than the fall in expenditure due to the less than proportionate fall in quantity demanded. As a result, the total expenditure of consumers increased. P0 Quantity of energy Price Di B A P1 Q1 Figure 2 : Energy Market in UK 0 SS0 SS1

Take note: • Not recommended to include operation of a price ceiling mechanism (e) With reference to Extract 4 and using a supply and demand diagram, explain and comment on the likely effects of the change in demand for solar energy and the change in government subsidies on the solar energy market in China. (6) R1: Overall increase in equilibrium price and increase in equilibrium quantity in the solar energy market There has been rising solar energy demand in China. Extract 4 mentioned that the growth rate for energy demand was 5.9% and much of this increase was from renewable energy. There could be several factors that may have contributed to this rising demand. Some of these are increase in tastes and preferences due to greater awareness of the non-pollutive nature of such energy compared to fossil fuel energy, increase in income that lead to increase use of energy which includes renewable energy, increase government rules and regulations that discourage the use of fossil fuel energy etc. On the supply side, the Chinese government recently announced that they no longer grant subsidies for new solar power stations. The removal of subsidies for new solar power stations will increase the cost of production of new solar energy producers which reduced their profitability. As a result, they will reduce supply. Overall, the market supply of renewable energy falls the supply curve shifts to the left from So to S1. A rise in demand and a fall in supply will result in a shortage at the market equilibrium price Po. This exerts an upward pressure on prices and price will increase from Po to P1. However, the change in the equilibrium quantity is indeterminate, depending on the extent of the rise in demand and the fall in supply. As the removal of subsidies is only for new solar power stations but not the existing power stations, the fall in supply may not be as great. On the other hand, the rising trend of using renewable energy has been going on for the last 20 years and so it is unlikely to change. As such, it can be assumed that the rise in demand is greater than the fall in supply. As a result, the equilibrium quantity will increase. Price of solar energy Quantity of solar energy P1 Q0 S1 D0 0 S0 E0 E1 P0 Q1 D1 Q3 Q2

R2: Overall increase in equilibrium price and fall in equilibrium quant