2012 NYJC_Prelim H1 Essay Q3 (Mark Scheme)

NYJC 2012 Preliminary Examinations (8819/Q3) 1 | P a g e 3. ‘Complete ban on smoking is the best measure to achieve efficient allocation of resources. ’ (a) Compare and contrast between merit and demerit goods. [10] (b) To what extent do you agree with the above statement? [15] ----------------------------------------------------------------------------------------------------------------------- -------------------------- A. Synopsis of Question Requirement: a) Students are to show ability to illustrate (preferably with the aid of examples) the apparent similarities and differences of private goods that are considered socially desirable and undesirable given the externalities emitted. b) Students are to show knowledge of the mechanism and limitations as well as ability to judge whether intervention measures via legal restrictions (complete ban) or any other intervention measures is a better way to help correct market failure and achieved allocative efficiency in a context of a private good consumption activity emitting negative externalities. B. Question Analysis/Unpacking: Technique Part (a) Part (b) (a) Content words: “merit”; “demerit” “Complete ban” (legal restriction); “best measure” & “efficient resource allocation” (b) Context words: No pre-defined context; generic; or freedom of choice of examples to be used “smoking” (private good consumption emitting negative externalities; demerit good) (c) Command words: “Compare and contrast” (ie. highlighting similarities and differences) “To what extent” (an evaluation of degree of validity of a presented assertion/position). C. Suggested Approach: Part (a) Introduction: Define concepts 1. Merit Goods - commodities that the government/society values and judges everyone should have regardless whether an individual wants them. 2. Demerit Goods -- commodities that the government/society values and judges everyone should not have regardless whether an individual wants them. Body: Make comparisons of similarities and differences of both concepts making use of relevant examples. Criterion Merit Goods Demerit Goods Similarities  Private goods characterized by rivalry and excludability in consumption  No free rider problem  hence goods are marketable  Divisible into small units and can be individually consumed  Cost incurred in providing additional unit (MC is positive) Differences  Accorded socially desirable status; high social benefits  Generates positive externality (MSB > MPB)  Under-produced/under-consumed  inefficient resource allocation (Qsocially optimum output > Qequilibrium output)  Accorded socially undesirable status; high social costs  Generates negative externality (MSC > MPC)  Over-produced/over-consumed  inefficient resources allocation (Qsocially optimum output < Qequilibrium output) Conclusion: Both are sources of market failure that necessitates government intervention so