M1_H2_ECONS_CSQ1_Answer_scheme

1    Page 1 of 5    CSQ1 answers (a)(i) With reference to Table 1, distinguish the trends in beer consumption in the United States of America with that of China from 2008 to 2012. [2]  The beer consumption in China is generally increasing while the beer consumption in US is generally decreasing.  The beer consumption in China is always higher than the beer consumption in US.  The extent of increase of beer consumption in china is greater than the extent of the decrease of beer consumption in US.  There is a reversal of consumption trend in China and US from year 2011 to year 2012. (a)(ii) Account for the trends observed. [4] General trend: Increase in demand due to increase in income for China. (Assuming beer is a normal good.) Increase in demand due to change in taste and preference towards beer. Americans are more health conscious versus China where there is no guideline on responsible drinking. Ill- informed therefore more harm to them. Americans are switching their consumption towards wine or other substitutes. Refinement: Chinese population is higher than US. (b)(i) Explain the term ‘market failure’. [2] Market failure is when the price mechanism has failed to allocate resources efficiently [1m] in a free market where MSB is not equal to MSC [1m]. The good is either over-consumed or over-produced/ the right goods are bit produced in the right amount [1m]. Either 2 points is sufficient. (b)(ii) With the aid of a diagram, explain how market failure could arise from consumption of beer. [4] The consumption of beer generates negative externality like drink driving. Assuming there is no external benefit, the MSB=MPB. When left to free market, the consumers will consume beer up to the quantity Qe. [1m] Due to the negative externality like drink- driving [1m] causing accidents to third party is present; there will be a divergence between the MSC and MPC. The social optimal level of consumption, where MSB=MSC is at output Qs. [1m] Under this circumstance, there is an over-consumption of beer as a result of the negative externality. The over-consumption [1m] leads to a deadweight loss of the shaded area in figure below.

2    Page 2 of 5    Or imperfect information. Perceived cost is smaller than the true cost of consuming beer to individuals. No reference to extract, max of 3m can be awarded. (c) With reference to the data, discuss the effectiveness of taxation in discouraging beer consumption. [8]

3    Page 3 of 5    How taxation works to discourage beer consumption Taxation on sale of beer will increase cost of production and result in a lower profit per unit. Supply of beer will decrease and the supply shifts to the left, increasing the equilibrium price of beer. Hence quantity of beer consumed falls towards the socially optimal level. (Diagr