2024 ASR H3 Economics Paper 1 Suggested Answer

2024 A-Level H3 Economics Paper 1 Case Study Question Suggested Answers Qn Question / Suggested Answer Marks (a) Using game theory, explain how the fear of shortages might lead to panic buying. [6] Game theory provides a framework for understanding why the fear of shortages might lead to panic buying even if no actual shortage exists at the point of purchase. In game theory, in contrast to traditional economic analysis, individuals make decisions based not only on their own preferences but also on what they expect others to do. The classic Prisoner's Dilemma and coordination games illustrate how rational individuals, acting in their own self-interest, can produce collectively suboptimal outcome. This model can be applied to the case of panic buying, as follows: Imagine a scenario with two strategies, where the two players in the game are the shopper and everyone else. The shopper has two strategies: • Shop normally (buy what he or she needs) • Panic buy (stockpile excessively) However, the payoff to the shopper depends on what others do as well as the shopper’s own action: • If everyone shops normally, supplies remain available, and everyone benefits as they would be able to purchase the necessary supplies the next time they require it and would not need to stockpile supplies which incur an opportunity cost (the other goods that they could have purchased instead of unnecessarily stockpiling) • If others start panic buying, those who shop normally risk being left with nothing. Nash Equilibrium emerges when each person's strategy is optimal given the strategy of others. If the shopper believes that everyone else will panic buy, the best response is to panic buy as well, to avoid missing out on essentials such as hand santisers. This creates a self-fulfilling prophecy: the fear of shortage leads to stockpiling, which in turn causes the very shortage people feared, meaning both parties ‘lose’ out. The payoff matrix below provides more detail about the potential gains and losses. Shopper Everyone Else Shop Normally Panic Buy Shop Normally (4,4) (1,5) Panic Buy (5,1) (2,2) As shown in the payoff matrix above, the dominant strategy of both players is to ‘Panic Buy’ as the benefits is higher than the strategy of ‘Shop Normally’ regardless of the action of the other player. Thus, the Nash equilibrium will be for both players to Panic Buy leading to a scenario of shortages and bare supermarket shelves. Marker’s comments: Generally, responses were well explained. Candidates demonstrated a strong knowledge and understanding of game theory. A payoff matrix was used to explain how the fear of shortages might lead to panic buying. Stronger responses used the information in the case study to refer to the two players in the game as ‘the shopper’ and ‘everyone else’. They also gave appropriate values for the possible outcomes from the game. Almost all candidates gave clear explanations of how a Nash equilibrium was achieved. (b) Explain how stockpiling might be considered ‘an example of tragedy of the commons’.

The tragedy of the commons most famously articulated by Garrett Hardin, an American ecologist, in his influential 1968 essay titled "The Tragedy of the Commons. Hardin used the term to describe how individuals acting in their own self-interest can overuse and ultimately deplete shared resources, leading to collective ruin. While Hardin used the example of a shared grazing field as ‘the commons’, this concept has been extended to understand diverse problems such as overfishing, air pollution, deforestation and climate change. Stockpiling of essential goods such as hand santisers, toiletries and food staples can be understood to be a form of tragedy of the commons. The commons, meaning goods that are accessible to all members of the society – in this case, as the prices of essential goods are generally low and form a small proportion of household income, most if not all members in society would have access to the goods. Also, as these are considered to be essential goods, it is not feasible to prevent people from purchasing these goods. However, the consumption of these goods are rival, in the sense that consuming one additional unit of sanitiser (for example), reduces the availability of these resources for the next user. People who are faced with the possibility that the pandemic would result in quarantine and the inability to go out to purchase essential goods, then make the rational decision to stockpile and ensure a readily available supply of essential goods such as good during the days of quarantine. Others might also rationally assume that the masses would stock up on as many essential goods as possible and to pre-empt this, by also stockpiling on the essential goods. The result is that each individual stockpiles and ‘overuses or draws down’ on the ‘commons’ or the essential goods. The ‘commons’ is also not able to replenish quickly, as the pandemic resulted in global supply chain disruptions such as port closures, making it difficult for supermarkets to restock these essential goods. The result as stated in Extract 2 are entire grocery aisle laying empty or bare, similar to the eroded and bare common grazing grounds described by Hardin. Marker’s Comments Stronger responses applied the economic concept of a common pool resource (i.e. a rival and non-rival excludable good) to explain how stockpiling might lead to tragedy of the commons. These responses made good use of the information in the case study extracts. They explained that it was difficult to exclude consumers from buying some of these ‘essential’ products, as the price was low and made up a very small part of a household’s income. Weaker responses did not give a clear definition of a common pool resource and made limited reference to the case study material. Hence, they were less convincing in their explanation of how stockpiling was an example of the tragedy of the commons. © Discuss whether buying behaviours during the COVID-19 pandemic are good examples of bounded willpower and bounded self-interest. [8] There are two types of buying behaviour that were exhibited during the COVID-19 pandemic: a) Stockpiling or panic buying b) Buying in a socially responsible manner (i.e. restricting the amount of essential goods the consumer purchases to allow others to have access to the necessary goods) Both of the above buying behaviours diverge from the traditional economic analysis of a rational consumer who weighs their individual costs and benefits to decide whether to purchase or not. Bounded willpower and bounded self-interest are concepts which could explain the buying behaviour exhibited above.

Bounded willpower refers to the idea that people often struggle to follow through on their long-term plans and intentions due to limited self-control. Even when individuals know the optimal choice for their future well-being, they may still opt for immediate gratification, leading to behaviors like impulsive spending. In Extract 4, it states that ‘extreme panic buyers in Singapore …indulged in excessive stockpiling more than what they need three times or more’, such excessive stockpiling coud be due to fear overcoming their self- control or rationality. While the consumer may understand cognitively that Singapore has ample food supplies and supplies of other essential goods, the overriding fear or concern that these items will not be available leads to them stockpiling at their own detriment. In addition, due to hyperbolic discounting, consumers may prioritise or overweight their immediate satisfaction or reward (e.g. the assurance that they have the essential products that they need). As food products are perishable and have a shelf-life, over stock-piling may result in these food products spoiling and them not able to even consume these products in the