CJC 2020 A-level CSQ1 ANS

2020 GCE A Levels H1 CSQ1: The role of government in resource allocation [aligned to 8843 Syllabus] (a) Using information in Extract 1, compare the government spending as a percentage of GDP in the UK to that in other countries. The government spending as a percentage of GDP in the UK is the third highest among the countries, behind France and Sweden. [1] The government spending as a percentage of GDP in the UK is always higher that of Singapore from 2008 to 2016. [1] The government spending as a percentage of GDP in the UK generally decreased from 2008 to 2016 while Singapore’s remained relatively constant. [1] The government spending as a percentage of GDP in the UK is higher than that of 7 countries in 2016. [1] 3 key comparisons – 3m [3] (b) Using information from Extract 2A, identify and explain three two factors that have caused the demand for passenger transport in the UK to change. Passenger transport in the UK comprises railway, bus & car transport. According to Extract 2A, the demand for passenger transport (railway) in the UK has been increasing from 1997 - 2017, except 2008 - 2009. Any 2 factors: Factor 1: Low level of economic activity (Financial Crisis) Level of economic activity affects the demand for passenger transport for commuting between home and work. As seen in Extract 2A, the contraction of the UK economy due to the financial crisis would cause the derived demand for labour to decrease since production and output decreases, therefore the derived demand for passenger transport to commute between work and home decreases. OR In the case of a financial crisis, incomes are likely to fall. Purchasing power of consumers decrease, and assuming passenger transport to be a normal good, there will be a fall in demand. Factor 2: Population Size Increase in population size increases the number of users and hence increases the demand for passenger transport. Factor 3: Government Policy of freezing fuel tax While “train and bus fares have been going up”, fuel tax on motorists has been frozen. This mean that travelling by train and bus is relatively more expensive than travelling [64]

by cars. This will lead to a fall in the quantity demanded for passenger transport by rail and bus while the demand for passenger transport by cars increases, ceteris paribus. (c) Using supply and demand analysis, explain the conclusion reached in Extract 2B that ‘the usual market adjustment process simply does not work’ in the UK housing market. 1. Explain ‘usual market adjustment process’ applied to housing market Disequilibrium in the form of shortage (due to, for instance, a rise in DD for housing)  upward pressure on P → As ↑P → ↑Qs as producers are signaled to produce & ↓Qd as higher price rations consumers who are unwilling and unable to pay the higher prices out of the market, until shortage is eliminated at new eqm where eqm P and Q are higher → the market, through price changes, adjusts to restore equilibrium 2. Explain why ‘usual market adjustment process simply does not work’ in the UK housing market However in the UK housing market, when disequilibrium in the form of shortage exerts an upward pressure on price → As ↑P → Producers and consumers expect further ↑ P. Such expectations of future price increases result in the following 2 characteristics of the UK housing market: ● Fall in SS as a result of sellers’ expectation of future prices. This is because if homeowners are expecting the price of the houses to rise in the future, this would reduce the current supply of housing into the market as they would be likely to hold on to their houses to sell in future for higher profits. ● Increase in DD as a result of consumers’ expectation of future prices. This is because if consumers expect the price of houses to increase in future, they will increase their demand for new houses in the current period so as to avoid paying higher prices in future. Hence the ↑ P, instead of eliminating the shortage and restoring the housing market to a new equilibrium, led to ↓SS & ↑DD causing the disequilibrium in the form of shortage to persist preventing the market to adjust to a new equilibrium. [Optional – included for understanding] Moreover, as seen in Extract 2B, Britain has strict planning laws that prevent the increase in quantity supplied as prices rise. Therefore, as prices increases, while producers of housing and existing house owners are signaled to sell their houses, quantity supplied is likely to remain unchanged in the short-term i.e., PES = 0. At the same time, government’s ‘help to buy’ scheme has also led to increase in demand for housing which exacerbates the shortage and hence th e rise in price. This causes sharp increases in housing prices further reinforcing expectations of future higher prices and so accelerate the increase in DD and fall in SS as explained earlier, preventing the housing market from reaching equilibrium. [65] (d) Given the relationship that exists between price elasticity of demand (PED) and total

revenue, explain and comment on the claim in Extract 2C that the rate of indirect tax on scotch whisky should be cut. [86] 1. Given the relationship that exists between PED & TR, explain why the rate of indirect tax on scotch whiskey should be cut [4] ▪ Identify & explain relationship between PED & TR for scotch whiskey The price elasticity of demand is the degree of responsiveness of quantity demanded with respect to change in price, ceteris paribus. Total revenue is the amount revenue earned from sale of product which is the product of price and quantity. The imposition of indirect tax will increase the price of scotch whisky. Indirect tax is the tax on scotch whisky and will increase the cost of supplying scotch whisky for the producers. This reduces profits per unit and hence supply of scotch whisky. The shortage will cause an upward pressure on prices. Whether total revenue rises or falls depends on the PED for scotch whiskey. PED is likely to be > 1 since the rise in price from the 3.9% increase in indirect tax caused quantity demanded to fall so much (Ext 2c) i.e., fall by more than proportionate. Hence the rise in price is likely to cause a fall in total revenue as the increase in revenue from the rise in price is more than offset by the fall in revenue due to the more than proportionate fall in quantity demanded → inverse relationship between P & TR ▪ Apply relationship bet PED & TR to impact of ▲indirect tax on tax revenue ➢ Indirect tax revenue = Tax per unit x Qdafter tax ➢ ↑indirect tax (→ ↑P) → MTP↓Qd → ↓tax revenue (Ext. 2C: “government tax revenue actually fell”) as ↑tax revenue from ↑indirect tax < ↓tax revenue from MTP↓Qd ➢ On the other hand, ↓indirect tax (→ ↓P)→ MTP↑Qd → ↑tax revenue (Ext. 2C: 2% cut in tax resulted in a 4% rise in revenues for government) ➢ In addition, producer post-tax revenue will also increase as ↓P from the cut in tax → MTP ↑Qd → ↓ revenue from ↓P < ↑ revenue from MTP↑Qd ▪ Link back to Qn: Hence, indirect tax on whiskey should be ↓ because ➢ [Must write] It raises producer post -tax revenue → improves welfare of scotch whiskey producers. Scotch Whisky Association is requesting a cut to protect producer interest as the association represents whiskey producer interest. ➢ [Must write] It raises government tax revenue → greater budget to finance G for development and to provide subsidies for bus & rail (Ext 2A) and housing (Ext 2B) especially since UK’s G spending is > 40% of GDP – one the largest (Table 1 & 2) → boost AG & PG → ↑current & future SOL ➢ [Option 1] MTP↑Qd → Greater production by whiskey producers → ↑D for labour (derived DD) → create jobs and employment (Ext 2C: “…industry supports 40 000 jobs”) ➢ [Option 2] ↓P → ↑export competitiveness → ↑X since PED>1 → Significantly boost AD an