MI H1 ECONS P1 Answer

2015 Millennia Institute H1 PU2 PE2 Answers CSQ 1 (a) (i) With reference to Table 1, describe the trend in farmgate milk prices in Aust ralia from July 2011 to January 2014. [2] Farmgate milk prices fell and then rose [1] with the minimum price in January 2013. [1] (ii) Explain one possible reason for the changes in Australian milk prices observed a b o v e . [ 2 ] Plausible reasons include  ↑DD – rising Y, lifestyle (taste/preference) or  ↓SS – rising cost of production (higher input prices such as animal feeds) (b) Explain why farmers “are complaining that they are being paid less’ in Extract 1. [4]  Bumper crop → oversupply  With ↑SS, Pe ↓ & Qe ↑, ceteris paribus (DD remains constant)  TR received by farmers would ↓ if DD is price inelastic (as Qe ↑ by less than proportionate compared to the Pe↓) (c) Explain how a weaker New Zealand dollar increases demand for dairy products from New Zealand. [2]  Weaker New Zealand dollar  price of exports in terms of foreign currency is cheaper  increase quantity demanded for dairy products from New Zealand (d) (i) With reference to Extract 4, explain why market failure occurs in the market for fresh agricultural products. [6]  Define market failure: A situation in which the unregulated market is unable to attain social optimal output level where marginal social benefit (MSB) equals marginal social cost (MSC).  In the market for fresh agricultural prod uce, fresh produce require cooling in the refrigerators. When the companies decide to cool their fresh produce using synthetic refrigerants, they make the decision based on their marginal private benefit (MPB) and marginal private cost (MPC). Thus, the number of cooling systems using synthetic refrigerant gases is at quantity, Qe.  However, according to extract 4, synthet ic gases are heavy greenhouse polluters which will result in global warming. The increase in temperatures will affect crop yield and hence farmers who depend on t he weather for their crops may not be able to earn any income due to the reduction in crop yield. Thus, negative externalities are generated as farmers wh o are not involved in consumption of cooling systems using synthetic gases have to bear the cost of reduction in profits.  Due to the presence of negative externalities, there is a divergence between MSC and MPC. As there is no external benef its incurred, MSB = MPB. Hence, at market equilibrium output Qe, MSC is higher than MSB. This implies that the society values the consumption of coo ling systems using synthetic gases less than the cost of consuming them.  The socially efficient output should be where MSC = MSB at output Qs. Since Qe is more than Qs, there is over-consumption of the cooling systems using synthetic gases that generates negative externalities. Due to the over-allocation of resources, there is a deadweight loss to society represented by area AEB.  Thus, market failure occurs due to allocati ve efficiency in the market of cooling systems of fresh agricultural produce.  Diagram:

2  9732/01/P2/MI/2015 E B  A MEC QeQs  MPC Quantity of cooling systems  using synthetic gases  Costs/Benefits  MPB = MSB MSC L3 Developed thesis and anti-thesis on how switching to natural refrigerants will be effective in reducing greenhouse emissions and identify that there needs to be co-operation among other industries to effectively reduce greenhouse emissions. 5 – 6 L2 Undeveloped thesis and anti-thesis on how switching to natural refrigerants will be effective in reducing greenhouse emissions OR One-sided analysis of how switching to natural refrigerants may or may not be effective in reducing greenhouse emissions. 3 – 4 L1 For an answer that has some basic correct facts without further explanation. For exam ple, listing the source of market failure. 1 – 2 (ii) Discuss the extent to which switching to natural refrigerants will help to reduce greenhouse gas emissions. [6]  Thesis: o Since the fresh agricultural produce industry is responsible for more than 11 per cent of greenhouse gas emissions in Australia (Extract 4), switching to natural refrigerants which are not greenhouse polluting will reduce greenhouse emissions.  Anti-thesis: o Not enforceable by law  if no companies want to switch their cooling systems to one that is running on natural refrigerants, greenhouse gases will not be reduced. o Other industries, such as the mining industries, also contribute to the emission of greenhouse pollutants. Evidence: other industries are responsible for 89% of greenhouse gas emissions in Australia.  Alternative policy: o Subsidise companies to encourage the use of natural refrigerants for their cooling systems.  Conclusion: o Require a mix of policies to help tackle the issue of greenhouse

3   emissions in the fresh agricultural produce market. o Require the co-operation from other industries to ensure that there is greenhouse gas emissions is effectively reduced. L3 Clear explanation of how use of synthetic gases in cooling systems lead to market failure with well-labelled diagram. 5 – 6 L2 Undeveloped and theoretical explanation of how the presence of negative externalities leads to market failure. 3 – 4 L1 For an answer that has some basi c correct facts without further explanation. For example, listing the source of market failure. 1 – 2 (e) Discuss the impact of the removal of protectionist measures in the Australian dairy market. [8]  Introduction: o Define protectionist measures and give examples o Identify that removal of protectionis t measures affect both consumers and producers.  Body 1:Postiive impact on consumers o Removal of protectionist measures  freer trade  increase imports  increase variety of products improve material standard of living o Removal of protectionist measures  more competitive  lower prices of dairy products  improve material standard of living  Body 2: Positive impact on producers o Removal of protectionist measures  increase competition in the Australian dairy market. In order to remain competitive, dairy farms need to increase productivity and improve herd management (Extract 5)  Body 3: Negative impact on producers o Farmers who do not have the ability to engage in R&D to improve productivity and herd management may have to leave the industry in the long-run. Evidence: number of dairy farms in Australia has fallen  Evaluation: In the short –run, there will be structural adjustments in the market and only the firms who are able to improve productivity and management of the farms would be able to survive and continue production. Thus, there will be negative impact on the producers in the short-run. However, in the long-run, consumers will be better off due to lower prices and greater variety of goods a nd services. At the same time, productivity will improve. L3 Well analysed answer that discusses both positive and negative impacts of the removal of pr otectionist measures on both consumers and producers. 5 – 6 L2 For an answer that analyses only the positive impact of removal of protectionist measures on consumers and producers. OR An answer that analyses the negative impacts on producers and consumers. OR An answer that analyses the positive and negative impacts on either producers or consumers. 3 – 4 L1 For an answer that has some basic facts. E.g. listing of protectionist measures. 1