2013 IJC H1 Econs QP

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8819/01/IJC/Sep 2013 2 Section A Answer all questions in this section. Question 1 Rare Earths Market Rare earths are a group of 17 chemical elements that are used widely in high- technology and clean-energy products becaus e they impart special properties of magnetism, luminescence, and strength. So me of these products include magnets, lasers, nuclear reactors, plasma TVs, energy-saving light bulbs, wind turbines, hybrid cars and even guided missiles. Extract 1: Rare earths prices The demand for rare-earths is rising rapidly as they are increasin gly being used in a wide range of high-technology products. Produc tion of wind turbines is expected to climb sharply amid the cl amour for cleaner energy alte rnatives that reduce dependence on fossil fuels blamed for global climate change. China, supplier of 95% of the 17 elements known as ra re earths, has shut-down many of its rare earths mi ning sites and cut its export quotas of rare earths. The government may further reduce export quotas. Hitachi Metals Ltd, which uses rare earths to make magnets used in hybrid cars, said that it has become increasingly difficult to procure rare earths. Toshinori Hata, a spokesman for Hitachi Metals, said that the company would hav e no choice but to pass on some of its costs to the consumers. Adapted from Bloomberg, 17 June 2011 Figure 1: Rare Earths Price Index: 2002 – 2010 Source: The Economist 400 Price Index Year 1,200 1,000 800 600 200 100 0

8819/01/IJC/Sep 2013 3 Extract 2: The Chinese consolidate the industry Beijing authorities are creating a single government-controlled monopoly, Bao Gang Rare Earth, to mine and proc ess ore in northern China, t he region that accounts for two-thirds of China’s output. The governm ent is ordering 31 mo stly private rare earths processing companies to close this y ear in that region and is forcing four other companies into mergers with Bao Gang. Chinese officials say that the government is worried about the external costs from the rare earths industry such as polluted water, polluted air and radioactive residues, particularly among many small and privat e companies, some of which operate without the proper licenses. While rare earth s themselves are not radioactive, they are always found in ore containing radioac tive thorium and require careful handling and processing to avoid contaminating the environment. Rare earths ore has to be refined before it can be used commercially. The waste generated from this process is both acidic and radioactive. The refining process leaves behind a radioactive sludge laced with toxic chemical compounds that is stored in artificial lakes. D ue to lax regulations, this radi oactive waste material often seeps into the water supply, adversely affecting the health of residents in the area. Adapted from The New York Times, 15 September 2011 Extract 3: The Chinese government st eps-up regulation on the rare earth industry The local governments of th ree regions where most of China's light rare earths metals exist will jointly crack down on the illegal exploration and production of light rare earths, the Ministry of Land and Resour ces said in a statement on its website. The operation aims to "promote the prot ection and rational development of the country's rare earths resources and furthe r regulate their production," said the ministry. The country has stopped issuing new license s for rare earths mining. It has also imposed production caps, enforced export quotas and announced tougher environmental standards for rare earths produc tion in order to co ntrol environmental damage and protect the resour ces. The taxes and quotas China had in place to restrict rare earths exports caused many companies to move their factories to China from the United States and Europe so that they could secure a reliable and inexpensive source of raw materials. Earlier this year, the government releas ed a statement announcing that it would impose a tax on rare earths minerals. Accord ing to the statement released, the tax rate of mined light rare earths would be 60 y uan (US$ 9.1) per tonne, while that of medium and heavy rare earths would be set at 30 yuan (US$ 4.5) per tonne. The government will use the tax to support research on rare earths processing, set up environmental compensation funds and build rare earths reserves. Adapted from China Daily, 27 September 2011

8819/01/IJC/Sep 2013 4 Extract 4: Will China continue to dominate the rare earths market? China has only 37% of the wo rld’s proven rare earths reserves but accounts for 95% of global production. This is not only due to the country’s good geographical location but also its willingness to do dirty, toxic and often radioactive work that the rest of the world has long shunned. Even so, the costs of mineral extraction are increasing because of lower ore grades and increasing capital costs. China’s cost s of production are likely to rise as environmental and social costs and the potentia l for rising labor costs begin to be incorporated into China’s rare earths production and processing operations. China would likely be unable to increase production significantly to drive prices down. While limited production and processing capacit y for rare earths currently exists elsewhere in the world, additional capacity is expected to be developed in the United States, Australia, and Canada within two to five years, according to some experts. 34 Chinese producers are also seeking to expand their production capacity or seek long-term supply agreements in areas around t he world, particularly in Africa and Australia. There are only a few exploratio n companies that develop the resource, and because of long lead times needed from discovery to refined elements, supply constraints are likely in the short term. Adapted from The New York Times, 29 October 2010 Questions: (a) (i) With reference to Figure 1, describe the trend in the world price for rare earths between 2002 and 2010. [2] (ii) Explain how the trend in world pr ice for rare earths would impact the market for hybrid cars. [4] (b) (i) With reference to Extr act 2, explain how the existence of 'external costs' leads to market failure. [4] (ii) With reference to Extract 3, ex plain how China can reduce these 'external costs' through the im position of a tax on rare earths minerals. [6] (c) As