2013_VJC_H1_Econs_Economics Prelims (answers)

2013 JC2 Prelim Economics H1 CSQ 1 a. i) Describe the trend of world coffee prices in Figure 1. [2] World coffee prices were generally rising until end of 1Q in 2011 (1), thereafter falling (1). ii) Using economic concepts, account for the changes in world coffee prices between 2010 and 2012. [5] Coffee prices were rising between 2010 and 1Q 2011 can be explained by (max 3m): 1) Increase in DD - Increase in number of coffee drinkers - Increase in speculation DD due to expectations of rising prices 2) Fall in SS - Poor harvest in leading coffee -producing countries, e.g. Brazil and Columbia Coffee prices were falling between 1Q2011 and beginning of 2012 can be explained by (max 2m): 1) Decrease in DD - Decrease in speculation DD due to volatility in the financial market - Decrease in DD due to falling income Changes in prices have been significant due to inelastic SS of coffee (max 2m). - Any shifts in the DD curve will result in a sharp change in the prices. 3+2+2 = max 5 iii) With reference to the data, explain how the trend of world coffee prices will continue in 2013. [3] Expectation that SS will increase faster than the increase in DD  expectation of falling prices (1)  fall in DD (1)  world coffee prices will continue to fall (1) b i) Using economic analysis, explain the market failure described in Extract 3. [4] There is no well-established property right of water bodies (2m)  Coffee planters will free -ride on the water bodies and discharge waste water into water bodies at low or no cost

Since coffee planters only care about their private benefits and costs and do not care about externalities (3m)  Coffee planters will discharge waste water into water bodies since that is the cheapest way to deal with the waste water  Since waste wa ter released is a health hazard and causes stomach diseases, MEC > 0  The irresponsible actions of coffee planters will result in welfare loss ii) In light of the above market failure, you have been tasked by the government to evaluate the appropriateness of the measures implemented by the various bodies mentioned in the data and recommend how the market failure can be better tackled. [8] Measure #1: Lagoon methods to treat water + Regulation This technique recycles the waste water gener ated from the coffee pulping machines until the water is free from pollutants. Hence, if the coffee planters use this technique there will be a reduction in negative externalities generated which addresses the root of the market failure. Regulation is a c ommand measure and there needs to be close monitoring and harsh penalties in place to stop the coffee planters from continuing to pollute the water bodies and flout the rules set by the PCB. This is necessary for the measure to be successful Evaluation: - This measure is however resource intensive as manpower has to be allocated by PCB or village gove