2013 SRJC H1 Econs

© SRJC 8819/01/JC2 Prelim Exam/2013 [Turn over ECONOMICS 8819/01 Higher 1 PAPER 1 2013 3 hours Additional Materials: Writing paper SERANGOON JUNIOR COLLEGE JC 2 Preliminary Examination READ THESE INSTRUCTIONS FIRST Write down your name and civics group on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A (2 hr 15 minutes) Answer all questions. Section B (45 minutes) Answer one question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.

2 © SRJC 8819/01/JC 2 Prelim Exam H1 Econs/2013/Answer Outline & Markers’ Comments Section A Answer all questions in this section. Question 1 Too hard to swallow Extract 1: World food prices jump to record high World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations (UN) said, exceeding leve ls reached in 2008 that sparked deadly riots from Haiti to Egypt. Sugar prices climbed for a third year in a row in 2010, and corn prices jumped the most in four years in Chicago. Food prices may rise more unless the world grain crop increases “significantly” in 2011, the Food and Agriculture Organisation said. At least 13 people died last year in Mozambique in protests against plans to lift bread prices. Last month’s year-on-year rise was higher than the 43 percent jump in food prices in June 2008. Record costs, crop problems, increasing demand, and the push for biofuel all contributed to the crisis that year. Global grain output will have to rise at least 2 percent this year to meet demand in 2011 and avoid further depletion of stocks, the UN agency has said. Source: www.bloomberg.com, 5 January 2011 Extract 2: Scrap biofuel support to curb food prices Governments should scrap policies to support biofuels because they are forcing up global food prices, according to a report by 10 international agencies including the World Bank and World Trade Organisation. The report adds to growing opposition to biof uels targets and subsidies such as those in Europe, Canada, India and the United States. "If oil prices are high and a crop's value in the energy market exceeds that in the food ma rket, crops will be diverted to the production of biofuels, which will increase the price of food," said the report. Biofuels have sparked a fierce "food versus fuel" debate since a spike in food prices from 2007 to 2008 that triggered riots in some developing countries. Biofuels have also come under increasing scrutiny for encouraging deforestation, a side-effect that can sometimes make their carbon footprint bigger than that of fossil fuels. Biofuels absorbed around 20 percent of sugar cane from 2007 to 2009, 9 percent of oilseeds and coarse grains and 4 percent of sugar beet, the report said. Source: www.reuters.com, 10 June 2011 Extract 3: Carbon taxes, emissions trading and regulation There are three key approaches governments around the world are taking in a bid to lower carbon emissions: carbon taxes, emissions-trading schemes (ETS), and regulation.

3 © SRJC 8819/01/JC 2 Prelim Exam H1 Econs/2013/Answer Outline & Markers’ Comments Carbon tax is a measure where the government sets the price of carbon.  The resulting market forces determine how much the quantity of emissions is reduced.  Businesses have certainty about t he price of carbon emissions.  The resulting level of emissions would vary. Standard ETS is a measure that the government caps total emissions and issues permits to emit up to that amount.  Businesses can trade the permits, so the market determines the price of carbon.  The price of emissions fluctuates, can be volatile.  There is a set limit on the final level of emissions. Regulation enables the government to direct businesses and households to lower emissions. Examples include closing high-emissions factories or power plants and restricting new investment in high-emissions sectors. Source: www.abc.net.au Figure 1: World price of sugar (US cents/pound) Source: http://www.thebioenergysite.com Figure 2: Closing stocks of sugar (millions of tonnes) Source: http://www.thebioenergysite.com 2006 2007 2008 2009 2010 0 10 20 30 40 50 60 70 80 2006 2007 2008 2009 2010

4 © SRJC 8819/01/JC 2 Prelim Exam H1 Econs/2013/Answer Outline & Markers’ Comments Questions (a) (i) Describe the trend of sugar prices from 2006 to 2010. [2] (ii) Explain whether there is a stable relati onship between stock level and the price of sugar. [3] (b) With the aid of a diagram, explain the possible factors leading to a rise in food prices. [5] (c) Explain how a removal of biofuel subsidy affects the total revenue of biofuel producers. [4] (d) (i) With reference to the data, explain how the existence of a negative externality can lead to market failure. [5] (ii) Using demand and supply analysis, explain how emissions-trading scheme (ETS) works to reduce carbon emissions. [3] (iii) Discuss whether the carbon tax or regulation is a better policy to address the market failure. [8] [Total: 30 marks]

5 © SRJC 8819/01/JC 2 Prelim Exam H1 Econs/2013/Answer Outline & Markers’ Comments Suggested Mark Scheme (a) (i) Describe the trend of sugar prices from 2006 to 2010. [2]  Overall it rose.  There is a sharp rise from 2008 to 2009. (ii) Explain whether there is a stable relationship between stock level and the price of sugar. [3] - Mainly inverse relationship as seen in 2008, 2009 and 2010. Explain reason for inverse r/s: o E.g.2008-2009, there is a fall in the stock level could be due to rise in DD (determinant: growing world population) greater than the rise in SSshortageupward pressure on prices when P, some producers find it more profitable to sell their sugar stock thus stock. o OR e.g. 2009-2010 where stock level and prices of sugar both fell because of a recent bumper harvest (SS determinant)surplus downward pressure on price as P, producers who are not willing to sell at a lower price will  stock in anticipation of a correction to future prices. - Identify and explain direct r/s: o However in 2006-2007 both the stock level and price  demonstrating a direct relationship. This is an anomaly and could be due to P producers stock in anticipation of further  prices (SS determinant). A possible cause of future price  could be news of a looming bad harvest that will cause a shortage. (b) With the aid of a diagram, explain the possible factors leading to a rise in food prices. [5] The rise in food prices is due to rise in demand and fall in supply. Rise in demand can be due to rising world population. As food is necessary for survival, the growth in world population means more mouths to feed and thus the rise in demand. Fall in SS due to ‘record costs’ and cro