YJC H1 ECONS P1 Suggested Answers and Markers Report

1 Yishun Junior College 2017 JC2 H1 Economics Paper 1 Preliminary Examination Suggested Answers, Marking Schemes & Markers’ Comments Question 1 (a) i) With reference to Figure 1, describe the trend in t he world price of steel between March 2009 and March 2016. [2] Suggested answer: World price of steel generally rose between Mar 200 9 to end 2011 before decreasing generally until Mar 2016. ii) With reference to the case material and use of a di agram, explain the change in world price of steel in 2015. [5] Suggested answer: World price of steel generally fell in 2015. A fall in price could be due to decrease in demand and/or increase in supply. Reason for the decrease in DD: 1) The decrease in global demand for steel stems fr om the fall in demand for steel from China, Brazil and Russia. And since China is responsible f or nearly half the global metals demand, a decrease in demand from China due to slow-down in the construction industry will lead to a large (extent) fall in global demand. Reasons for the increase in SS: 1) Overcapacity in China (Ext 1 P3) could have led to increase in SS or over-supply of steel to the world market. This can be seen from Ext 3 P4 th at China government is aiming to shut down facilities producing 100 to 150 million tonnes annually by 2020. 2) China could also be dumping their steel into the global market. This will increase in SS of steel in the world market at low prices. This can be seen from Ext 3 P2 and 5 where China’s steel exports reached a record 112.4m tonnes (19% i ncrease) but value fell by 10.5% (prices would have decreased by approximately 30%) (b) i) Explain one example of negative externality which c ould result from steel production. [2] Suggested answer: 1) Greenhouse gases emissions causing global warmin g

2 2) Air pollution affecting the health of population and visibility in country. ii) With the use of a diagram, explain how negative externality in steel production could lead to market failure. [5] Suggested answer: 1) Greenhouse gases emissions and air pollution are negative externalities which are negative spill-over effects on 3 rd parties MEC > 0. MSC = MPC + MEC MSC > MPC 2) Since individuals only consider marginal private cost and benefit in their decision-making, market/private equilibrium will be when MPC = MPB Ep Qp 3) However, society welfare is maximised when MSB = MSC Es Qs 4) Since Qp > Qs over-production of QsQp units. Between QsQp, MSC > MSB, summing up the whole area will give the deadweight loss. iii) Explain the measure undertaken by the Chinese government (from Extract 3) in tackling the negative externalities a ssociated with steel production and discuss an alternative policy option the Chinese government could consider. [8] Suggested answer: Measure undertaken = regulation (setting standards, emission limits or environmental rules) Explanation of how measure work to tackle negative externalities: • The Chinese government probably have ‘calculated’ the optimal level of emissions and in turn set emission limits for firms. • Firms are supposed to abide by these limits and re duce their emissions through reduction in production or adopting cleaner methods of production. • This will reduce the amount of negative externalit ies to the socially optimal level. Alternative options = subsidy into R&D for cleaner production methods, taxation on emissions/production or others • Explanation of how measure work to tackle negative externalities • Evaluation of effectiveness of measure in tackling negative externalities • Overall judgement L1 Able to describe how both measures work or state so me limitations or unintended consequences or able to explain clearly how existing measure work 1 – 2 L2 Able to explain clearly how both measures work only (1-sided) Or Able to explain how existing measure work and expla in how alternative measure could be limited in effectiveness or uninte nded consequences (1- sided) 3 – 4 L3 Able to explain how existing measure work and expla in and evaluate how alternative measure may or may not tackle the negative externalities 5 – 6 E Able to provide value judgement on the overall ef fectiveness of alternative measure 1 – 2

3 (c) Discuss if UK and EU should adopt protectionist measures against Chinese steel in circumstances described in the case material. [8] Suggested answer: UK and EU governments should adopt protectionist measures against Chinese steel: • There is a possibility of China dumping steel into UK and EU. As highlighted in Ext 4, China’s steel exports reac hed a record 112.4m tonnes (up 19%) but their value fell 10.5% as a result of falling price s. This has led to European and UK steel factories to close down and putting thousands of jo bs at risk. The same could be said to have happened to US as well. Therefore, UK and EU govern ment should adopt protectionist measures to protect their own producers from being driven out by foreign (unfair) competition. In fact, Ext 4 further highlighted that Chinese-mad e steel exports enjoyed a tax rebate policy or the Chinese-made steel products have enjoyed unfair subsidies from the government. • Protection jobs in the home industries Regardless of whether there is fair competition (ch eap imports due to CA) or unfair competition (cheap imports due to government subsidies). UK and EU governments should adopt protectionist measures to protect the jobs and inco mes of workers in the steel industries. By ensuring that the local firms can withstand the for eign competition, production will continue and that will provide jobs and income for UK and EU steel workers. • Environmental concerns (can accept, but this wasn’ t presented in the notes) UK and EU governments may adopt protectionist measu res against Chinese steel for environmental reasons. It is quite clear from Ext 2 and 3 that Chinese steel firms are highly pollutive. Some more argue that the low prices coul d be the result of lack of adoption of cleaner but expensive production methods. Therefore, by putting (for example) a tariff on Chinese steel, the quantity demanded for Chinese steel will fall and lesser pollution will be created. UK and EU governments should not adopt protectionist measures against Chinese steel: • China may have the comparative advantage in steel production or UK and EU do not have the comparative advantage Ext 2 mentioned that there is overcapacity of steel output in country. This could be due to China’s factor endowment in cheap low-skilled worke rs or low-cost land which has resulted in lower opp cost of production. As mentioned above, t he older (but dirtier) production methods could also be cheaper. Therefore, China may indeed have the comparative advantage in steel production. What more, if US should impose 522% tariff on Chinese steel, clearly the opp cost for producing steel in US is way higher than China. And since UK and EU are similar in the stage of economic development as US, UK and EU are not likely to have the comparative advantage in the production of steel.

4 Overall judgement • It is probably true that China indeed has the comp arative advantage in steel production and importing the cheaper steel into UK and EU will benefit the steel users or importers. • Also, the argument that China is dumping their ste el is difficult to ascertain due to lack of information on the actual marginal cost of production. • And if UK and EU should protect against Chinese st eel, it could invite retaliation by China which will adversely impact UK’s and EU’s exports to China. • Therefore, EU and UK should not adopt protectionis t measures against Chinese steel. L1 able to describe the case for and against protectionism 1 – 2 L2 Able to explain clearly the case for OR against protectionism (1-sided) 3 – 4 L3 Able to explain clear