PJC H1 ECONS P1 Q1

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 1 PJC 2017 H1 Prelim Exam Paper 1 Question 1: The impact of climate change (a) Using Table 1, compare the overall change in food p rices between 2006 and 2010 with that between 2011 and 2015. [3] Suggested answer: Food prices from 2006 to 2010 has been increasing w hile food prices from 2011 to 2015 has been falling. Food prices rose at a faster rate (47%) from 2006 to 2010 while food prices from 2011 to 2015 fell at a slower rate (28.6%). There was a fall in food prices from 2008 to 2009 w hile the fall in food price trend from 2011 to 2015 has been consistent. (b) With reference to Extract 2, define opportunity cost and give an example. [3] Suggested answer : Opportunity cost is the next best alternative foregone. Firms have to choose between investing in clean ene rgy sector and investing in capital good to increase output. If firms choose to invest in clean energy sector, they would forgo the profit that they would earn from increasing their output. Or Governments have to choose between spending in clea n energy to reduce negative externalities and promote steady sustainable growth , and to spending to promote actual economic growth. If they choose spend to ensure sus tainable growth, they would forgo current growth. Note: Due to question requirement ‘reference to extract 2’, answers from extract 1 or not related to climate change/growth will not be accepted. (c) With reference to Extract 3, explain whether supply or demand factors are likely to be more important in explaining changes in the price of food. [6] Suggested answer : With reference to Extract 3, changes in food prices can be affected by reasons such as rising population, weather changes, price elasticity of demand and supply and R&D. Demand factor As world population rises, there will be more mouths to feed and this will lead to a rise in demand for food as food is necessary for survival. The rise in demand for food will lead to a shortage at the original price, and with an up ward pressure on price, price of food will increase. As food crops require time for gesta tion and as a perishable good (mentioned in Extract 3 Para 1), the rise in demand against a price inelastic supply curve will cause food prices to rise significantly. Supply factor Poor weather conditions have made food crop cultiva tion unfavourable. This implies that food production will be disrupted, leading to a fal l in supply for food in the market for food. With demand for food being price inelastic as it is a necessity to all and supply falling drastically, the price of food will increase significantly. Overall judgement/conclusion

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 2 In the short run, supply side factors seem to be more influential in terms of affecting food prices as producers and countries may not be able to pre-empt and tackle such changes effectively. With stocks being low, the inelastic s upply of food makes changes in food prices even more volatile. However, in the long run, when food supply becomes more stable and increases as R&D efforts pay off (Extract 3, last para), demand factors possibly due to a rise in income and population may play a bigger role in affecting food prices. This is because the nature of food will not change and it is almost impossible to curb demand for food when population and income both rise over time. (d) With reference to Extract 3, explain why countries like the UK and the US are able to cope better compared to Africa and the Middle East in view of the significant rise in food prices. [4] Suggested answer : In UK and US, consumers consume a considerably grea ter amount of processed food compared to Africa and the Middle East. Hence when food prices rise, the cost of production for processed food will rise as fresh fo od is used as a factor input to produce processed food. This would result in a fall in the supply of processed food and a rise in the price of processed food. In comparison, this increase in the price of fresh food will be felt to a greater extent by consumers in Africa and the Middle East as they consume mainly fresh food and relatively less processed food, implying that consumers in UK and US will be able to cope better when food prices rise significantly. In addition, due to differences in the absolute lev el of income, the proportion of income spent on food by UK and US consumers is relatively lower compared to consumers in Africa and the Middle East. This is supported by ev idence from Extract 3 where it was mentioned that the poorest households in Africa and the Middle East are spending about 50% of their income on food, implying that when fre sh food prices rise and with a lower absolute level of income compared to UK and US consumers, they will be more affected. (e) With reference to Extract 3, explain whether the us e of export controls by governments to prevent rising food prices is justified. [6] Suggested answer : The reason for imposing export controls cited in Ex tract 3 was to cope with rising food prices which affected poorer households greatly and worsens equity. The use of export controls by governments of food producing countries is justified. By imposing export controls, this will increase the supply of food for the domestic economy (from S D to S’ D). At the original price, quantity supplied will ou tweigh quantity demanded, resulting in a downward pressure on price , leading to a fall in the price of food. The fall in the price of food will alleviate the pressures felt by poorer households. This is necessary as food is a necessity to all hou seholds and government has an obligation to ensure food prices are affordable to all. However, the use of export controls is protectionis tic in nature and may result in retaliatory actions taken by the country’s trade pa rtners. Such actions will reduce the export revenue of the country that implemented the export controls and bring about a contractionary impact on the economy. The impact wi ll be even more significant if the country depends on trade greatly as a key driver of economic growth. In addition, protectionism goes against the comparative advantag e theory, perpetuating inefficiency and limits the gains from trade.

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 3 Conclusion/Judgement Export controls are at most a short term measure to deal with ising food prices. In order to stabilize food prices and reduce food price vola tility, there must be efforts put in to raise supply through use of advanced farming techniques and technology. (f) Discuss the view that the problem of negative exter nalities caused by carbon emission from firms can best be solved by using a policy of tradable permits. [8] Suggested answer : Intro Negative externalities are generated from carbon em ission from firms. This result in market failure, where the free market fails to achi eve economic efficiency without government intervention. Hence, governments would consider whether market failure due to the carbon emission can best be solved by using a policy of tradable permits (Claim). However, its feasibility and effectiveness may cau se it not to be the best policy to correct market failure. The policy of tradable permits is the best to correct market failure. The carbon emission from firms will result in exter nal cost borne by third parties who are not directly involved in the production or consumpt ion of goods, which is not considered by firms. For example, high carbon emission resulti ng in severe climate change that damaged food crops. When the governments introduce the policy of tradable permits, it would force the firms to find the lowest possible cost method to r