2022 HCI H1 Econs Prelims suggested answer scheme

1 Question 1: The market for face mask Suggested Answer Outline (a) (i) Using Figure 1, compare the change in the global price in polypropylene (PP) between September 2020 and December 2020 wi th that between December 2020 and March 2021. [2] Key Similarity: Both increasing [1m] Key Difference: Faster rate of increase in 2nd period [1m] (ii) Using evidence from Extract 2 where appropriate, explain why the likely value of Price Elasticity of Supply (PES) of PP for face mask production is likely to be positive and low. [3] Positive PES – due to Law of supply – explain that P and Qs are positively related [1m] Low PES – [2m] Explain any one of the two appropriate determinants of PES<1 using relevant evidence: Factor 1 – Nature of production/ease of factor substitution; OR Factor 2 – Time period Possible Evidence: PP electret melt-blown non-woven, is a specialised fabric produced by a limited number of companies globally due to the high initial investment required in heavy machin ery. For this reason, it has been more difficult to increase production during the crisis, or to find companies that can switch to this manufacturing within a reasonable time and without massive investment. (iii) Using Extract 1 and PES value stated in (a)(ii), use a demand/supply diagram to account for the price variation of PP after December 2020, and comment why the price variation might not continue in the long term. [7] Diagram illustrating effects of low PES on P surge after Dec 2020 [1m]

2 Explain significant rise in derived demand of PP (Extract 1) – due to rise in demand due to change in taste & preference / WHO’s intervention with evidence [3m] Possible evidence from Extract 1 - To overcome this situation, several authorities such as CDC and World Health Organisation (WHO) have advised the use of face masks to reduce the unintended spread of infections. Also, due to rise in number of cases, there has been a global surge in demand for masks for personal health. Explain how rise in demand coupled with low PES lead to surge in price using diagram. [1m] Comment on whether price surge might not continue into the future [using evidence from Extract 1 to justify]. Price surge unlikely to continue - PES likely to become higher / SS increase given time [2m] Evidence from Extract 1 - manufacturers and key market players are ramping up the production across the globe. (b) Discuss the view that ‘putting a cap on prices achieves its intended effect of allocating masks more effectively and fairly.’ (Extract 3) Introduction – briefly explain ‘price cap’ – maximum price – lowers P but creates shortage. Thesis - Putting a cap on prices achieves its intended effect of allocating masks more fairly Lower price – provide access to masks for those consumers without the ability to buy (given the price surges) – esp for lower income group – enhance fairness Limitations – However, with reference to the diagram – shortage still exist – Qd<Qs at P2 – probably need a ‘rationing device’ to ensure that those who really need the mask can get it. AT – However, putting a cap on prices does not achieve its intended effect of allocating masks more effectively With reference to the diagram the lower prices cause quantity demanded to rise from Q3 to Q2 while quantity supplied falls from Q3 to Q1, resulting in a shortage of Q2 – Q1.

3 The reduction in availability of face masks as quantity supply falls means that the face masks are affordable only to those who are fortunate enough to get their hands on them at the controlled price. This shortage can result in the formation of black markets where the black -market price can be even higher than the original market equilibrium price P1. Hence the reduced availability of face masks or the problem of black markets can still result in low - income households having no access to the face masks, limiting the effectiveness of the price ceiling in achieving a fair distribution of face masks. Esp when DD rise faster – price adjustment cannot keep up (Extract 3) as the price signaling function is suppressed + SS remains low – production cannot keep up (Extract 1) EV - On the whole, price cap cannot achieve its intended effects of achieving both objectives. In fact, with the likely B lack market situation, both outcomes become unachievable. Market forces might be a better mechanism to allocate mask more effectively in the LR, but the fairness issue would need to be tackled using a different mechanism like rationing and/or subsidies. L2 Consolidate (Application and Analysis) Sound analysis and coherent economic arguments. Analyse how price cap can /cannot achieve fairness + allocating masks effectively , using economic reasoning, with reference to appropriate analysis / diagram(s) - optional. Clarify – give examples from data with elaboration. 4 – 6 L1 For an answer that demonstrates knowledge but lacks understanding, application and analysis: Insufficient scope of discussion, only touches on either shortage OR fairness. Lack of accuracy in the use of economic concepts, terms or phrasing of explanation. Mainly lifting from extracts without economic analysis. 1 – 3 E2 Evaluative Comment For an evaluation that contains: A synthesis using economic arguments to arrive at relevant judgements/decisions Evaluative comments supported by accurate, logical and clear analysis 2 E1 Relevant judgement(s) (did answer the question) but may not follow from relevant economic arguments. Comment (s) may lack depth, clarity, and logic. 1

4 (c) Identify and define the characteristics of public good, and carefully explain why the service provided by Singapore’s ‘pandemic taskforce’ is considered a public good. [7] Identify and define the TWO characteristics of public goods Non-excludability and non-rivalry in consumption. [1m] Non-excludable in consumption refers to the situation when it is technically impossible or prohibitively expensive to exclude non-payers from consuming the good/service. [1m] Non-rivalry in consumption refers to the situation where the consumption or use of the good or service by one consumer does not diminish the amount (and quality) of the good/service available for use by the next consumer. [1m] Note: the definitions must be based on perspective of consumption. ‘Services provided by Sin gapore’s pandemic taskforce’ (SP TF) [up to 4m] - measures included border control, mandatory 14-day quarantining for all returning residents, contact tracing and providing medical leave for mild cases allowing possible COVID -19 cases to self-isolate at home thus reducing community transmission. • SPTF provides various services ( above examples) to ensure that there is minimal community transmission of the disease and a healthier environment. • The consumption of such service by one resident in Singapore will not reduce the amount of benefit enjoyed by the next resident. Hence, the consumption of SPT’s service is non-rivalrous in consumption. • On the other hand, SPTF’s service is also non-excludable in consumption. • Once the service is provided to ensure that community transmission is minimised, every resident in Singapore enjoys the benefits of better health environment in the country regardless of whether they pay for it. And it is technically impractical/impossible to charge consumers for the service rendered. In conclusion, services by SPTF is a pure public good as it is both non-rivalrous and non-excludable in consumption.

5 (d) Merit goods are a category of private goods which are deemed to be socially desirable by the government and are under-consumed. Making reference to E