ACJC H1 ECONS P1 Qn1

1 ©ACJC2017 Preliminary Exam 8819/01 [Turn over H1 Economics 8819 Paper 1 Question 1: Suggested Markscheme Question 1: The Market for Higher Education (a) With reference to Table 1, compare the government expenditure per student for primary and university education from 2012 to 2015. [2]  Both government expenditure per student for primary level and university have generally increased from 2012 to 2015. [1]  Government expenditure per p rimary school student is always lower than university expenditure per student. [1] OR  Both government expenditure per student for primary level and university have generally increased from 2012 to 201 4 but for 2015, university expenditure per student has fallen while expenditure per p rimary school student continued to increase. [1] (b) With the aid of a diagram and using demand and supply analysis, explain two reasons for the expected increase in UK’s university tuition fees. [4] With references to Extract 2,  The increase in birth rates in UK  leads to the r ise in demand for university education  increase in DD (shift right from DDo to DD1) [1]  Cut in government s ubsidies for universities leading to higher COP for universities.  Decrease in SS (shift left from SSo to SS1) [1]  A shortage (of (QssQdd amount at initial price level of Po ) will occur in the market [1]  lead to an increase in price of university education (from Po to P1)  Diagram [1] 1m – DD factor 1m – SS factor 1m – price mechanism linking to shortage 1m – diagram (c) (i) With the aid of a diagram and with reference to Extract 1, explain how social outcomes associated with higher levels of educational attainment can lead to market failure. [6] [6]  Diagram to show how positive externalities associated with higher

2 ©ACJC2017 Preliminary Exam 8819/01 educational attainment can lead to under consumption and market failure (assume: no negative externality, thus MPC = MSC)  With reference to the extract, e xplain the positive external benefits that arise from higher educational attainment and relate it to the third parties. o According to Extract 1 , higher level of educational attainment can lower poverty and crime rates, creating a society that is more cohesive and safer for households. It also improves the quality of the labour force that is beneficial for economy long-term economic development, imp roving the standard of living of the future generations as well. These are some of the external benefits to the third parties.  Explanation of the market equilibrium o Individuals who seek to attain higher level of education only take into account their private benefits (such as the higher employability and wages earned) and private costs (such as the tuition fee for higher level education, time needed to graduate from higher educational etc.) o Thus the market equilibrium is at MPC = MPB, where level of university places taken up/ number of university students is at Qm  Explanation of the socially optimal equilibrium o However, these individuals do not account the external benefits related to higher level of education attained o Due to the external benefit incurred, MSB > MPB o The socially optimal equilibrium is at MSC = MSB, where level of university places taken up/ number of university students is Qs  Under-consumption and welfare loss o However, at Q M, MSB>MSC. This implies that the society’s welfare is not maximised at Q M. Hence, there will be a deadweight loss of the shaded areaABC . The increase in the number of students beyond Qm up to Qs will increase the net society’s welfare. o Thus if left t o the market , the number of university students will remain at 0Q m. There will be an under-consumption of higher education of QmQs and the market fails.

3 ©ACJC2017 Preliminary Exam 8819/01 [Turn over Level Descriptors Marks L3  A well-developed answer with good reasoning.  Clear and accurate economic analysis  Good use of relevant examples from the case study to support the explanation. 5 – 6 L2  Under-developed answer. Points are stated but lack coherent reasoning  Economic analysis contains some conceptual errors  Some attempt to use examples from case study and relate to the context. 3 – 4 L1  Descriptive answer with no economic analysis  Many conceptual errors. 1 – 2 (ii) Comment on whether Singapore should follow the UK’s cut in subsidies for university education. [6] Approach: Students should consider the reasons for the subsidies made by the Singapore govt. Based on extract 1, subsidies on higher education sector require a careful balancing between strategic considerations, equity, and efficiency. These consideratio ns could differ from what the UK govt based their decision to cut their subsidies on, however. Thus, on evaluation, cutting the subsidies would also entail a review of these considerations in the Singapore context. Argument for: Singapore should cut subsidies 1 Extent of private returns to higher education, as compared to external benefits: Considering that there are private returns of higher employability and wages (Extract 3) to higher education, it may be possible that current subsidy levels are too high. If students are to gain from higher education, then they should be willing to pay a larger proportion of the fees.  The govt may have overestimated the size of external benefits of higher education. A cut in subsidies would lower the quantity of places available in universities, and possibly lead to a better allocation of resources. [Students to insert diagram to illustrate possible over-subsidy of higher education] 2 High subsidies may lead to an overconsumption of higher education places, which would then lead to an over-supply of graduates. This could mean that the Singapore economy would have to be able to absorb the increase in graduate workers with sufficient capacity and opportunities for graduate-level jobs. If not, it could result in under-employment or, in an economic crisis, high unemployment. Thus to prevent this, a cut in subsidies would reduce the number of university places and reduce the rate of increase in graduates. 3 Improved range of courses by universities: Reducing subsidies would mean that universities would have to increase their fees for some consumers, or be more strategic in their offering of courses. a. Higher fees are viable as higher income consumers now have better ability to pay and thus do not need to be subsidised at the same level as those with lower income

4 ©ACJC2017 Preliminary Exam 8819/01 b. Consumers are more knowledgeable about higher education courses, and are more discerning about their choice of university courses to attain their dream career. Thus, universities can be allocatively more efficient with the reduced subsidies if they offer courses that consumers are willing and able to pay for. 4 Similar to the UK economy, the opportunity cost of subsidizing higher education could be high, considering that there are other priorities in the economy, for example caring for the aging population, improving public infrastructure on healthcare and transportation, and budgeting for industry transformation programmes. Counter- Argument: Singapore should not cut subsidies 1 Consideration of efficiency and equity: Extent of market failure caused by positive externalities and the income gap As expressed in extract 3, market failure exists in the market for higher education. Thus, there is a case for government to subsidize.  The extent of subsidies so far has generated a large pool of skilled and educated workforce, which has contributed immensely towards the economic progress of the country. This shows that the external benefit are lar