RI 2024 H2 Y6 Common Test - Examiner's Report - Final

ECONOMICS Higher 2 Syllabus 9570 Examiner’s Report Year 6 Timed Practice 2024 Raffles Institution Nurturing the Thinker, Leader & Pioneer TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y6/9570/TP/2024 2 © RI 2024 [Turn Over ECONOMICS Y6 H2 Common Test 2024 Paper 9570/02 Paper 1 & 2 Suggested answers (a) Using Figure 1, compare the trends of population and water demand in Singapore. [2] • From 1960 to 2030, there was an increase in both the population and water demand in Singapore. • However, the extent of increase in water demand was greater / faster compared to the extent of increase in population. Mark Scheme • 1m for similarity and 1m for difference. Examiner’s Comments • This question was generally not as well done as expected. This was mainly due to many students doing an absolute comparison of population and water demand, e.g., stating that water demand exceeded population in a certain year. This is incorrect, as these two pieces of data are not comparable, as both are of different units. Hence the second mark for the difference was not awarded. • Another reason why the full marks were not awarded was the lack of a comparative term such as “however”, “but”, or “while”. (b) Explain why PUB pegs the price of water to the “marginal cost of producing and supplying the next drop of water” as mentioned in Extract 3. [2] • The reason is because PUB aims to achieve allocative efficiency. [intention] • By using this pricing approach, the value that society places on the last unit of water produced (i.e. the price) is equal to the opportunity cost of producing it (i.e. MC), thus maximising social welfare. [how it is obtained] Mark Scheme • 1m for explaining the intention and 1m for explaining how AE is attained. Examiner’s Comments • Most candidates understood the purpose of PUB’s policy. Most were able to identify that doing so was for the purpose of achieving allocative efficiency, but the quality of explanation was missing. Most candidates that did not obtain the second mark was due to very vague explanations. A common incomplete answer was recognising how allocative efficiency is attained but did not explain that the price represented society’s valuation of the last unit of water.

Y6/9570/TP/2024 3 © RI 2024 [Turn Over (c) With the aid of a diagram, explain how the “sewage spills into rivers and coastal waters” (Extract 1) affects social welfare in UK. [5] • Sewage spills into rivers and coastal waters are considered a negative production externality in the market for water. • This is because of neglect or poor maintenance of the water pipes that resulted in wastewater spilling out into water bodies. This is supported in Extract 1 as the day job of maintaining the assets has been done very badly in some cases. • The 3rd parties who are negatively affected are people who are not involved in the provision of water and fall sick when they get into contact with the contaminated water bodies, thus incurring medical bills (MEC>0). • In the pursuit of self-interests, water producers ignore the negative production externality, resulting in a divergence between the MPC incurred by themselves and the MSC incurred by the society in Figure 1 where MSC is greater than MPC due to MEC > 0. • Assuming no other sources of market failure and a perfectly competitive market, the self-interest, profit-seeking water producers consider only its own private costs and the price they receive for providing water. Hence, the free-market output level is Qe quantity of water where MPB = MPC while the socially optimal level is at Qs where MSC = MSB. • As Qe > Qs, there is an overproduction and overconsumption of water, leading to a deadweight loss of area EE1A because the benefits to society from the consumption of QeQs is less than the cost to society, thus social welfare is not maximised. Mark Scheme • 1m for identifying case evidence that the market for water generates negative production externality from Extract 1 • 2m for explaining the following o Explaining why the negative spillover effects are ignored à pursuit of self-interests o AND explaining the divergence - how that leads to a MSC being greater than MPC of production • 1m for derivation of free market output level (MPB=MPC) with pursuit of self-interest by producers stated and derivation of socially desired output level (MSB=MSC)

Y6/9570/TP/2024 4 © RI 2024 [Turn Over • 1m for linking to free market output level being higher than AE level, thus leading to deadweight loss and social welfare not maximised. • 1m for well labelled and well referenced diagram. Examiner’s Comments • This question was not as well done as expected. Most students were able to correctly identify that the problem was of negative externalities but were not able to score well due to lack of detailed analysis. • Common omissions included: o Not providing specific examples of 3rd parties and the specific impacts on them. o Not explaining how the free- market equilibrium and socially optimal level of output is derived. Many responses simply stated that they were at Qe and Qs respectively. o Not explaining what the deadweight loss area meant, rather, simply stated that there was DWL. • For a well-drawn and well reference diagram, candidates are reminded to label their diagram with axis and curves properly. • The x-axis should be Q of water – the good which when produced also generates the negative externalities. A handful of students labelled the x-axis as sewage spills. Do note that the x -axis cannot be labelled as the production externality itself. (d) With reference to Extract 1, explain why a water company in a particular geographical region can be considered a natural monopoly. [3] • High startup cost (e.g. building the water filtration plant, systems of distribution and piping etc.) à high natural barriers to entry o Coupled with statutory barriers to entry – each company granted a licence to provide exclusively for that area • These costs spread over a large range of output à the LRAC curve of the natural monopoly falls continually over the entire market demand, resulting in a very large MES • Market demand is large enough to support only one large firm operating at or near its minimum efficient scale of production (MES), other firms that enter unable to make normal profits at lower output levels Examiner’s Comments • This question was not as well done as expected, due to lack of specificity in explanation. • Most candidates were able to identify some form of BTE in the context, but some simply explained why it was a monopoly, rather than a natural monopoly. This would require the concept of having natural BTEs that result in a very large MES such that the market size could only support 1 large firm. (e) In view of the crisis in the UK water industry, discuss whether the UK government should nationalise Thames Water. [8] Introduction: Clarify key terms in the question • Crisis in the UK water industry: o High water bills, prices becoming unaffordable

Y6/9570/TP/2024 5 © RI 2024 [Turn Over o Poor maintenance of water infrastructure resulting in sewage spills into rivers and coastal waters, leakages, etc. • Nationalise: Transfer of ownership of the firm to the government (likely to require the government to purchase the assets and shares of the firm, i.e. government spending required) Thesis: Reasons for nationalisation (address the inefficiencies of Thames Water) Reason #1: Address the high water bills • Thames Water operating like a private monopoly: charging consumers high prices, paying large amounts of dividends to shareholders • Private monopoly faces a downward sloping AR curve as it has 100% market share, and is subject to the law of demand