2013_HCI_H1_Econs_CSQ 1

HWA CHONG INSTITUTION Year Two H1 Economics 2013   Section A: Case Study Question 1 Japan and The Future of Energy Suggested Mark Scheme (a) (i) Compare the change in price of crude oil and natural gas between 2009 and 2011. [2] Similarity: Both increased from 2009 to 2010. [1m] Difference: While price of crude oil continued to increase thereafter, price of natural gas fell. [1m] (ii) Using supply and demand analysis , account for the difference above. [3] Use dd-ss analysis Ext 1: “Fukushima nuclear accident leading to a sharp rebound in the demand of conventional oil-based energy in 2010”  rise in demand [1m] Ext 1: “turmoils in Middle East”  fall in supply [1m]  Rise in prices in crude oil Ext 1: “technological enhancement” for natural gas  rise in COP  rise in supply [1m]  fall in prices of natural gas 1m for each factor identified and link to dd/ss & price. (b) With reference to Extract 2, explain two demand factors that have led to the booming alternative fuel vehicle market. [4] Change in price of related good Ext 2: “Rising diesel costs last year… buying trucks that will run on cheaper natural gas...”  relatively cheap natural gas (substitute)  rise in qty dd for natural gas  rise in dd for AFVs that run on natural gas (complements) Change in tastes & preferences Ext 2: “Driving cars that run on alternat ive fuels like liquefied natural gas can cut emissions and reduce dependence on foreign fuels…”  changing tastes and prefs  rise in demand for AFVs (c) Using a diagram, explain how the production of conventional oil-based energy leads to market failure. Cost-benefit diagram to analyse ineffici ent resource allocation (neg ext) in the [5]

HWA CHONG INSTITUTION Year Two H1 Economics 2013   production of energy (Refer to Ext 1: carbon emissions) Market failure is said to occur when free markets, operating without any government intervention, fail to allocate scarce resources efficiently, in a way that maximises society’s welfare. <SMB-SMC diagram showing negative externality and welfare loss> An individual power plant which genera tes conventional oil-bas ed energy will only take into account its privat e costs and benefits. In a free market, the equilibrium occurs at Qe where PMB=PMC Its private benefits include revenue from the sale of conventional oil-based energy. Its private costs would be labour costs and costs of running the power plant. However, this plant does not consider the negative externalities that would be generated – e.g. carbon emissions leading to global warming and pollutants resulting in air pollution. The costs of suc h effects e.g. healthcare costs to third parties (residents staying in the vicini ty/ farmers experiencing poor harvests) not involved in the production and consumption are not taken into consideration by the individual plant (EMC). Hence, due to the presence of negative externalities, there exists