NYJC H1 ECONS P1 8823 Suggested Answers

Suggested Answer: CSQ 1 Qn Questions a)(i) Why might the changes shown in Table 1 have led to a decrease in the world price of sugar? [2] Greater surplus of sugar in the world markets. (1m) Surplus in 2016/17 = 173,980 – 170,773 = 3,207 (,000 metric tons) Surplus in 2017/18 = 191,823 – 174,125 = 17,688 (,000 metric tons) The surplus grew bigger thus adding more pressure for prices to decrease in the price of sugar. (1m) a)(ii) Given the information contained in Table 1, identify the country that has had the greatest impact on world prices. Justify your answer. [3] The country with the greatest impact would be the one with the greatest change to supply or demand for cotton on the world market. (1m) 2016/1 7 2017/1 8 2016/1 7 2017/1 8 2016/1 7 2017/1 8 China 9,300 10,250 15,600 15,700 -6,300 -5,450 India 22,200 32,445 25,500 26,500 -3,300 5,945 Europea n Union 18,313 21,150 18,700 18,800 -387 2,350 Pakistan 6,825 7,425 5,100 5,400 1,725 2,025 United States 8,136 8,393 10,979 11,181 -2,843 -2,788 India has had a large impact as it changed from a net importer (-3,300 000 metric tons) to a net exporter (5,945 000 metric tons) (From adding to supply to adding to demand). (2m) b) Using diagrams, explain what determines the extent of the change in the quantity of soft drinks consumed by the different types of consumers following the imposition of the sugar tax in UK. [4] • Identify the “different types of consumers”; those with price elastic dd vs those with price inelastic dd. • - PED<1 include consumers with high income (expenditure on sugar is a small proportion of income). • - PED>1 include consumers with low income.

• The factor that determines the extent of the change in price when an indirect tax is imposed is the PED. • Define PED. (1m) • Show the contrast in Price when PED>1 and when PED<1. (Q to Qi vs Q to Qe) (3m) c) Extract 2 refers to the effects of removing quota on sugar production. Using a supply and demand diagram, explain the effect on the market for sugar in UK of such quota removal. [3] -Define ‘Quota’ (1m) -Price & Quantity with quota is Pq and Qq. (1m) -After the removal of the quota, Price will fall to Pe and quantity will rise to Qe. (1m) d) Explain the determinants of a rational consumer’s decision on whether to consume sugary drinks. [6] - Explain what constitutes ‘rational’ decision making (to maximize net benefits) (1m) - Relate ‘utility’ to consumer’s benefit. (1m) - Explain the marginalist principle: (2m) • Define marginal cost and marginal benefit. • Explain why net benefits is maximized at the consumption level where marginal benefit equals marginal costs. - Explain the determinants of marginal benefit. (tastes, price of substitutes, complements, intended and unintended benefits etc) (1m) - Explain the determinants of marginal costs. (price paid for the good, time given up for the consumption process, other goods forgone, intended and unintended costs etc) (1m) e)(i) Using Extract 3, explain why the Singapore government would want ‘to reduce the amount of sugar in all the soft drinks consumed in Singapore’. [5] S0 Pq Price Squota Pe D0 Quantity (sugar) Qe Qq

- State the Micro objective of government (Allocative Efficiency). To achieve this governments strive to eliminate (or reduce) deadweight loss, due to negative externality in consumption and information failure. (1m) - Explain how the consumption of sugar leads to external costs (illness) Deadweight loss resulting from external costs: (2m) Note: The MEC identified should be loss in efficiency due to illness (diabetes) Deadweight Loss due to information failure. (When Perceived Benefit > Actual Benefits) (2m) Note: Equal credit should be awarded to those who take the costs approach i.e, (Perceived Costs < Actual Costs) [Max of 3m is only ONE source of mkt failure is explained] e)(ii) Discuss whether the problem of increased incidence of diabetes in Singapore caused by the unlimited consumption of sugary drinks can better solved by education rather than indirect taxation. [10] INTRO: Outline the criterion by which policy solutions are assessed; including ‘effectiveness’ (ability to eliminate the deadweight loss) and cost of implementation (monetary costs & opportunity costs) THESIS: Explain how education can be effective eliminating the d w loss resulting from overconsumption of sugary drinks. - Limitations; effectiveness of internalising the external cost and/or correcting the misinformation, explicit costs of education programmes. -ANTITHESIS: Explain how the taxation works.

- Outline the limitations. ASSESSMENT of the 2 approaches (compare limitations of education with taxation) JUDGEMENT. Come to a judgement (made here with SR and LR considerations) L3 Question requirements are interpreted accurately - Both sources of mkt failure are addressed by the education & taxation. - The effectiveness of the two approaches are compared adequately - The criterion for assessment is clearly outlined. Appropriate concepts and diagrams are used accurately - MSB/MSC analysis is accurately used. - Clear understanding of MPB perceived and MPBactual is demonstrated. - Diagrams are clearly drawn and accurately labelled (in context) - Shows a clear understanding of how the measures work. 5-7 L2 Addresses some questions requirement adequately Incomplete (inaccurate) use of MSB/MSC analysis Weak / unclear explanation of how the measures work. Little or no comparison of the two measures and their limitations. 3-4 L1 A sketchy inaccurate answer that shows misunderstanding of the question requirements. 1-2 E2 Good evaluation, well-reasoned and supported. 2-3 E1 Some unsupported evaluative statements. 1 f) Instead of discouraging the consumption of sugary drinks, there should be subsidies on healthy dietary choices. Discuss whether subsidies on healthy dietary choices promote the efficient working of the price mechanism. [12]

Intro: “Efficient working” (using market based intervention tools) Thesis (subsidising the consumer) • Show how subsidising the consumer can correct market failure caused by positive externalities. (promotes the efficient working of Price Mechanism) • Subsidies achieve this as a market based tool • Promotes the working of the price mechanism. • Examine the limitations Antithesis (subsidising producer) • Show how subsidising the producer can correct market failure caused by positive externalities.(Promotes the efficient working of the Price Mechanism) • Examine the limitations (generic limitations of subsidies) o The amount of subsidies given can lead to over or under consumption due to imperfect info and the inaccurate valuation of the MEB by the government. o Opportunity cost of using subsid ies. Consideration of subsidies better utilised in other areas (e.g. healthcare) Judgement: Considerations: - Which kind of subsidy is better? Why? - Are there any other approaches that promotes the working of the Price Mechanism better? L3 Question requirements are interpreted accurately - Shows good understanding of market based vs non- market based approaches. - Recognises the relationship between ‘healthy food choices’ and ‘unhealthy food choices’. (can be viewed as merit vs demerit goods) - Clearly shows the limitations of using subsidies. 6-9 L2 Addresses some questions requirement adequately 3-5 L1 A sketchy inaccurate answer that shows misunderstanding of the question requirements. 1-2 E2 Good evaluation, based on the measure being supportive of the price mechanism. 2-3 E1 Some unsupported evaluative statements. 1 [Total: 45]

Suggested Answer: CSQ 2 (a) Using Tab