2016 J1 H2 Promo Exam Ans for sharing v2

JURONG JUNIOR COLLEGE 2016 JC1 ECONOMICS 9757 (H2) PROMOTIONAL EXAMINATION ANSWER BOOKLET © Jurong Junior College 2016 (H2)

2 2016 J1 H2 Promo Case Study Answers (a) (i) With reference to Table 1, compare the change in the share of total business car -hire rides among car rentals, taxis and private-hire cars between 2014 and 2016. [2] • Difference: In general, the share of total business car -hire rides among car rentals and taxis decreased between 2014 and 2016 whereas the share of total business car -hire rides for ride - hailing increased between 2014 and 2016. [1] • Difference: Among car rentals, taxis and private -hire cars, private -hire cars experienced the greatest change in market share (38%) as compared to taxis (-23%) and car rentals (-15%). [1] (b) (i) With reference to Figure 2, explain the market structure that the traditional taxi industry in Singapore currently operates in. [2] • The traditional taxi industry in Singapore is an oligopoly. [1] • Based on Figure 2, the four-firm concentration ratio of the traditional taxi industry in Singapore is 90.2%, which suggests that a few large firms dominate the industry. [1] (b) (ii) With reference to Extract 1, explain how the characteristics of the traditional taxi industry influence prices in the industry. [4] Characteristic 1: High barriers to entry • There are high barriers to entry in the traditional taxi industry. Extract 1: High initial capital outlay in taxi industry • No competition to erode supernormal profits earned. • This prevents prices from being lowered. Characteristic 2: Mutual interdependence • Firms in an oligopoly are mutually interdependent. • In the traditional taxi industry, the taxi operators engage in tacit collusion in the form of price leadership. In this case, the firms in the industry look to one firm, raising and lowering their prices when it does. As seen in Extract 1, taxi operators followed industry leader ComfortDe lGro when it implemented a fare hike in 2011. (Only 1 mark to be awarded if candidate merely states price leadership without making reference to the extract) (c) (i) Explain how market failure may arise due to asymmetric information when drivers purchase used cars from used car dealers. [4] • Market failure may arise in the used car market due to asymmetric information in the form of adverse selection against higher quality used cars in favour of used cars of a lower quality. • Sellers in the used car market have more information than buyers regarding the actual quality of the car. In order to profit more from the sale, sellers may conceal crucial information about the condition of the car from potential buyers.

3 • Taking this into consideration, potential buyers of used cars tend to lower the price that they are willing to pay for used cars. • At this lower price, sellers with used cars in good condition are unwilling to offer their cars for sale. Thus, asymmetric information will result in market failure. (c) (ii) Discuss the extent to which Singapore’s Lemon Law helps to correct market failure due to asymmetric information in the used car market. [8] Thesis: Explain how Singapore’s Lemon Law helps to cor rect market failure in the used car market. Singapore’s Lemon Law • Singapore’s Lemon Law is a law that protects consumers by requiring producers to compensate consumers if producers sell defective goods which do not meet standards of quality and performance (Extract 4) • It provides sellers with an incentive to be truthful about the actual condition or quality of the used cars that they sell • This provides consumers with the assurance that t he used cars they purchase are of decent quality, and that the car they are getting is what they have paid for. Anti-thesis 1: Evaluate the limitations of the Singapore’s Lemon Law in correcting market failure due to asymmetric information 1. Costs of Enforcement • Singapore’s Lemon Law is costly to enforce. There are manpower costs incurred by government agencies such as CASE. Opportunity costs are also incurred since public funds channeled towards enforcement cannot be allocated for other public projects 2. Costs to Producers When Consumers Make Unwarranted Claims • Some buyers may attempt to make claims under Lemon Law despite not being eligible for it , as evidenced by sellers’ claims that some consumers abuse the process and try to make claims for car problems that arise due to regular wear and tear as mentioned in Extract 4. However, these claims may be awarded in consumers’ favour, which in turn pose s an extra and unfair cost on sellers. Anti-thesis 2: Explain how policies or factors other than Singapore’s Lemon Law may help to correct market failure in the used car market. Mandatory regular car inspections • Policies other than Singapore’s Lemon Law may be implemented to correct market failure in the used car market. The government may also force car owners to have their vehicles regularly checked by government officials. • This testing is to be done biennially once the car is more than 3 years old and annually once the car is more than 10 years old. (Extract 4) • Buyers of used cars can request for the most recent test results prior to purchasing. These test results serve as proof of the car’s condition and increase the amount of information available to buyers.

4 Evaluate the extent to which mandatory regular car inspections help to correct market failure in the used car market. • The test results may be outdated and may not provide potential buyers with accurate information about the condition of the used cars that they buy (Extract 4). Other companies may help to reduce the asymmetric information between buyers and sellers in the used car market. • Other companies such as Edmunds.com and FindTheBest have been helping to correct the market failure that exists in the used car market by providing consumers with information on the quality of the cars that they intend to buy • This reduces the information asymmetry between buyers and sellers, which leads to more efficient markets. Synthesis State the stand • Singapore’s Lemon Law is useful to some extent in correcting market failure in the used car market as it indirectly increases the supply of information that consumers have. Justify the stand using criteria for judgment • However, the increase in information provided depends on the extent to which sellers believe they can get away with not being truthful as well as the costs of being caught , including the negative impact on their reputation if caught. • In contrast to the Lemon Law, mandatory regular car inspe ctions as well as the actions of other companies such as Edmunds.com and FindTheBest increase the amount of information that consumers have directly, thus avoiding the abovementioned limitations . Thus, the presence of other policies may render Singapore’s Lemon Law unnecessary to some extent. Marking Scheme Level Descriptors Marks L2 Two-sided and well-developed answer that argues how Singapore’s Lemon Law may help to correct market failure in the used car market as well as its limitations. Answer also considers how other factors such as mandatory regular car inspections as well as the provision of information by other firms in the market may help to correct the problem of asymmetric information without the need for Singapore’s Lemon Law to correct market failure. Good reference made to case evidence. Max 5 marks if no mention is made of other factors that help to correct market failure, i.e. answer only explains how Singapore’s Lemon Law helps to correct market failure as well as its limitations. 4 – 6 L1 One-sided answer that only explains how Singapore’s Lemon Law help to correct market failure in the used car market, without making