2013_DHS_H1_EC_Ans Scheme

1 DUNMAN HIGH SCHOOL H1 Preliminary Examinations 2013 Economics 8819 Answer and Mark Schemes

2 Suggested Answers Case Study Question 1 (a) Using Figure 1, compare the trend in food and fuel prices between March 2001 and March 2011. [2] This question requires candidates to describe the 1. similarity in the general trend observed for food and fuel prices over the stipulated period, and 2. difference in the trend Generally, both increased [1], but fuel price rose and fell more sharply than food prices. [1]  1 mark for similarity and 1 mark for difference (b) With reference to Extract 1, explain why the Thai government must intervene in setting up infrastructures as such canals and flood control systems for a more efficient allocation of resources. [4] This question requires candidates to 1. identify that these infrastructures exhibit the characteristics of public goods 2. explain how these public goods cause the market to fail, which justifies why the Thai government must intervene to achieve a more efficient resource allocation  Infrastructures such as canals and flood control systems are public goods that exhibit the characteristics of non-rivalry and non-excludability.  Non rivalry – A good is non-rivalled in consumption when the consumption of the good by one person does not diminish the quantity available for others to consume and benefit from. When the canals and flood control systems are built, all citizens who live in the vicinity of these infrastructures benefit from reduced risks of flooding, and such benefits will not be reduced with every additional consumption. Thus the marginal cost (MC) of preventing flooding via construction of infrastructures to an additional resident within the country is negligible. Since the allocative efficient outcome is at price = MC, where the value (price) that consumers place on these infrastructures is the same as the cost of the resources used to produce an additional unit for additional consumption, the price to charge for an efficient allocation of resources to the production of these infrastructures should be at zero.  Non excludability – A good is non-excludable when it is impossible or prohibitively expensive to prevent or exclude anyone including non-payers from consuming the good once it is produced. When these infrastructures are built, it is likely that there is less risk of flooding during the monsoon season. Even if one does not pay for these infrastructures, he / she will still be protected from flooding risks. Since there is enjoyment of protection without paying, this leads to the problem of free-riding, which is supported by the evidence in Extract 1 “a good that cannot be confined to those who have paid for it”.  Under the market forces, there will be no provision of these infrastructures because the price mechanism is unable to function, since consumers are not