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 government to closely monitor the use of lagoon system. - Besides a well -established system of rules and penalties must be in place to effectively deter flouting of the rules. - However, due to resource constraints, there is weak monitoring by the PCB in the 1,300 coffee estates, hence enforcement was left to the village governments which may not have the expertise in dealing with the monitoring. - From the data, m any coffee planters in many estates are still not using the lagoon methods and continuing to generate external costs on third parties. Measure #2: Subsidies given to use dry pulpers Subsidies given to coffee planters reduce the cost of switching to dry pulpers which encourages these planters to use the dry pulpers which use less water and hence generate less waste water. This will reduce the negative externalities generated which will address the root of the market failure. Evaluation: - Due to the weak monitoring of the use of lagoon systems, higher subsidies can be given to encourage planters to switch to a ‘cleaner’ method.

- This could be a more efficient and sustainable measure to reduce the externalities. - However, the implementation costs are significant as the government or Coffee Board may not have the funds to channel into such subsidies. This can be seen from the data in that coffee planters seem to be delaying the switch to dry pulpers because they are waiting for the Coffee Board to increase the amount of subsidy from 20% to 50%. - Therefore, although it may be a more efficient and sustainable measure, the set up cost may be very high. Conclusion Several measures have been put in place to address the source of the market failure and if the coffee planters adhere to these measures the negative externalities will be reduced. However, it seems that the coffee planters have yet to take up the techniques which will reduce the amount of waste water generated which means that the source of the market failure is not addressed. Furthermore, it seems that due to the large number of coffee growing areas which translates to the large number of coffee planters, the government bodies are unable to enforce that the coffee planters are adhering to the rules. Hence, water pollution issue has not been resolved. Leve l Descriptor Mark s L1 An answer which lists the measures implemented to address the market failure with very little explanation. 1-2 L2 A one -sided answer which explains how the measures address the source of the market failure OR A two -sided answer which explains how the measures address the source of the market failure AND evaluates the effectiveness of the measures but there are gaps in the discussion. An answer which makes some reference to the data. 3-4 L3 A well-developed two-sided answer which discusses how the measures address the source of the market failure AND evaluates the effectiveness of the measures. An answer which thoroughly uses data evidence. 5-6 E1 Conclusion with little or no justification. +1 E2 Conclusion with justification. +2

c. Discuss the impact of globalisation on the coffee café market in India. [8] Impact on consumers: - Globalisation  entry of foreign firms into India (e.g. Starbucks)  increase in SS (i.e. more coffee chains/joints or competition forcing firms to be more efficient)  fall in prices (ceteris paribus) + increase in Q - Globalisation  entry of foreign firms into India  increasing competition amongst firms  better quality services (e.g. environment, experience) + better variety (e.g. can cater to different taste and preferences) Impact on producers: - Globalisation  entry of foreign firms into India  increases competition in the market  more competitive environment  India coffee café chains have to constantly innovate or bring down cost to maintain competitiveness  expansion of outlets + catering to local taste and preferences - Such firms may not lose a lot of market share as their prices are still relatively lower to those of Starbucks and the DD for such coffee will probably increase with growing affluence in India. Overall, the coffee café market in India should expand with a higher Q and lower P . There is also more variety and choices for the consumers. Efficiency (productive and allocative) should also improve Level Descriptor Mark s L1 An answer which lists the possible impact of globalisation on the coffee café market in India. 1-2 L2 An answer which explains 1) How the consumers will be impacted or how the producers will be impacted or 2) How the impact is positive or how the impact is negative OR An answer which explains (with gaps) 1) How the consumers will be impacted and how the producers will be impacted or 2) How the impact could be positive and/or negative The answer should make some reference to the data. 3-4 L3 A well -developed answer examining a range of impact whic