MI H2 ECONS P1

2014 Preliminary Examination II Pre-university 3 ECONOMICS 9732/01 Paper 1 17 September 2014 2 hours 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams or graphs. Do not use paper clips, highlighters, glue or correction fluid. Answer all the questions. Begin answer for Question 2 on a fresh sheet of writing paper. At the end of the examination, hand in your answers to the 2 questions separately. The number of marks is given in brackets [ ] at the end of each question or part question. This question paper consists of 8 printed pages. [Turn over

2    Answer all questions. Question 1 The World Beer Industry Table 1: Beer Consumption by Country (All Volumes in 000’s kiloliters) 2008 2009 2010 2011 2012 China 39,130 42,194 44,683 44,738 44,201 United States 25,004 24,483 24,138 23,861 24,186 Source: Kirin Holdings News Release, 2009 – 2012 Extract 1: The spirit level Awareness of the effects of alcohol is extremely low in China. For centuries people enjoyed booze at celebrations, but few drank regularly. As inco mes have shot up over the past 35 years, alcohol consumption has accelerated. Average annual consumpt ion rose from 2.5 litres of pure alcohol in 1978 to 6.7 litres in 2010. Nearly 70% of that is spirits. More than half the Chinese population do not drink. Those who do drink often do so to great excess. Male Chinese drinkers drink far more than Japanese ones, and almost as much as notoriously sozzled British, Australian or Irish boozers. Binge-drinking is prevalent and high-risk drinking has reached “epidemic proportions” in China, reckons Hao Wei of Central South University in Changsha, the capital of Hunan province. In China drinking with clients and colleagues is now seen as vital to career advancement; some job adverts even call for “good drinking capacity”. The state has taken some action in response. Drin k-driving cases fell by nearly 40% in the two years after May 2011, when the government st arted to clamp down and increase penalties. President Xi Jinping’s anti-corruption drive has quashed lavish banquets (although this has made high-end liquor much cheaper). But the government has done little to promote public education. Other countries have curbed drinking by increasing tax on booze. In 2006 China lowered its already paltry liquor tax. Its health services and professionals are poorly equipped to deal with alcohol-related problems, says Yilang Tang of Emory University in Atlanta, Georgia. There are no national guidelines on responsible drinking and the minimum drinking age is ambiguous. Rules relating to the sale, consumption and advertising of alcohol are weak or ill-enforced. As Central South University’s Mr Hao puts it: “Alcohol can be bought anywhere, at any time, by any person.” Source: The Economist, 9 August 2014 Extract 2: Why are American drinkers turning against beer? Light beer sales fell for three years after the recession in 2008. Just 20 years ago, it was America’s most popular alcoholic beverage by far. Since then, per capita consumption of beer down 20 percent and despite population growth, annual domestic production has fallen down, too.

3    One explanation has been that American drinkers are more health-conscious today because there are so many studies and media reports of studies that make it impossible to be less health- conscious. This has hurt high-sugar and empty-calorie drinks that face relentless press criticism. “You’re seeing that the consumer is taking a healthier look and having more alternatives [than soda], such as tea, and coconut water,” Thomas Mullarkey, an analyst from Morningstar. Wine is delicious and affordable and many Americans only just recently realised that. It’s not just Americans who are ordering bottles of wine in record numbers. Wine exports are growing every year, too. In this light, it’s not that Americans are turning against beer so much as our preferences are turning somewhat more European as our capacity to produce good affordable wine has caught up to the old continent. Source: The Atlantic, 5 August 2013 Extract 3: Britain’s binge drinking reaches crisis level Binge drinking – defined as consuming more than six drinks a session has reached crisis levels in Britain, health experts say, costing the cash-s trapped National Health Service 2.7 billion pounds (US$4.4 billion) a year, including the cost of hospital admissions related to booze-fueled violence and longer-term health problems. Under the mechanism known as the beer duty escalator, beer duty has risen by 2% above inflation each year since 2008. The level of tax rises with the strength of the beer and is paid directly by the brewer. The industry says beer duty has risen by 42% in the last 47 months. The Treasury generates around £3.7bn a year from duty on beer and cider. British beer in a pub is heavily hit with the duty and value-added tax leading to an average of 6 pubs closing per day. Source: The Daily Mail, 21 March 2012 Figure 1: Index no. of beer consumption, beer duty revenue, beer duty rate Source: UK Parliament Website, 2011

4    Extract 4: S’porean brewery bubbling over with big plans With the takeover by Dutch beer giant Heineken completed, brewer Asia Pacific Breweries (APB) is now eyeing bubbling opportunities in regional markets, said the new head of APB's Singapore operations. The brewery makes beers like Heineken and Tiger, and APB is hoping to increase its exports to regional markets like Japan, South Korea, Taiwan and the Philippines. To meet expansion plans, the brewery in Jalan Ahm ad Ibrahim will boost its capacity by 10 per cent over the next two months, and by 50 per cent within the next 18 months, said APB Singapore general manager Samson Wong, who took on the role four months ago. Wong says the leaner corporate structure after the takeover is opening the door for APB to expand its wings. A big hope is that the Singapore brewery will be able to export more beer to the region. In June, Heineken announced that it will integr ate its existing Singapore operations with APB's group headquarters here. The result is a new regional hub in Singapore for Heineken. "Now it's all under one roof, we can look at the development and supply chain arrangements," said Wong. "That helps us to be more aggressive in expanding our business." Among the target markets is Japan, which has traditionally imported its Heineken beer from the brewery in Amsterdam. Apart from being able to cut shipping time to Japan from Singapore compared with Europe, the Singapore brewery is also smaller and "more flexible" than its Amsterdam counterpart. Another aspect of growth is in expanding the reach of its brands, and APB plans to take Tiger Beer, a Singapore icon, to greater heights. "Now, about 47 countries carry Tiger and we hope to grow further in Western Europe," said Wong. He plays down the chances of cannibalisation between Heineken and Tiger, noting that both brands have existed beside each other for decades and that each beer will attract different consumers. "In fact, in one night, the same consumer can drink two different brands." Source: asianewsnet.net, 26 August 2013 Questions (a) (i) With reference to Table 1, compare the trends in beer consumption in the United States of America with that of China from 2008 to 2012. [2] (ii) Account for the trends observed. [4] (b) (i) Explain the term ‘market failure’. [2] (ii) With the aid of a diagram, explain how market failure could arise from consumption of beer. [4] (c) With reference to the data, discuss the effectiveness of taxation in discouraging beer consumption. [8] (d) Discuss the