AJC H2 ECONS P1

READ THESE INSTRUCTIONS FIRST Write your name, PDG and index number 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, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. Begin your answer to each question on a fresh sheet of writing paper. At the end of the examination, fasten your answers to each question (Questions 1 and 2) separately. Fasten this cover page in front of your answers to Question 1. The number of marks is given in brackets [ ] at the end of each question or part question. Name _______________________ ( ) PDG ______/13 This document consists of 7 printed pages and 1 blank page. [Turn over] Case Study Question No. Marks 1 / 30 2 / 30 Sub-total / 60 ANDERSON JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATION 2014 Higher 2 9732/01 ECONOMICS Paper 1 16 September 2014 2 hours 15 minutes Additional Materials: Answer paper

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3 Answer all questions. Question 1 Water Scarcity Figure 1: Global water consumption, year 2000 to 2050 by components *BRIICS: Brazil, Russia, India, Indonesia, China, South Africa RoW: Rest of World (excludes OECD and BRIICS) Source: The Environmental Outlook Baseline, accessed 25 August 2014 Figure 2: People living in areas of water scarcity, by level of scarcity, year 2005 to 2050 Source: OECD Environmental Outlook to 2050, accessed 25 August 2014 Year Year

4 Extract 1: Water scarcity and possible consequences Water scarcity is an increasing threat in many c ountries and regions, as water pollution and overuse reduce available sources, while populations grow and competition between different uses increases. Global water withdrawals from the environment doubled between 1960 and 2000. In particular, groundwater extraction has risen from 100 -150 km 3 to 950 -1000 km 3 per annum since the 1950s. Groundwater is water located beneath the earth’s surface. Extracted groundwater undergoes processing and becomes what is known as potable water, which is water that is safe en ough to be consumed by humans. Water use is projected to increase at a much higher pace in developing countries, where agriculture is by far the main user, resulting in a global share of agriculture water use of about 70%. Adapted from: OECD, Managing Water for All, 2009 Extract 2: Water is underpriced – the idea that we are not paying the true cost for water In the water business, there are frequent complaints that “water is too cheap”. That is, the consumer does not pay enough for water. In the developed world we have access to clean safe drinking water and sanitation. With respect to water, there is a case to be made to adjust water pricing. If the over-extraction of groundwater leads to an impact on fisheries, habitats or tourism downstream, shou ld the price reflect this? Who pays for this? The Polluter Pays Principle is often applied in environmental policy and economics. If an upstream city takes water out of a river, affecting cities downstream, there is a case to be made for adjusting the pric e of extraction to act as a disincentive to over-extraction or to reflect the real costs. Adapted from: Paul O’Callaghan, Water pricing is not the roadblock to innovation, 23 August 2013 Extract 3: The Dutch groundwater tax The Dutch groundwater tax applies to the extraction of groundwater by water works or by other entities (industry, agriculture) and aims to protect the scarce groundwater resource in the Netherlands. The policy is also aimed at raising revenue for fiscal reform. However, there were some complaints about the tax during the decision -making process, in particular from water - intensive industries such as beer and soft -drink producers and dairies. This is despite the fact that groundwater tax remains a minor element of the total water bill for these firms. Adapted from: ECOTEC, Study on the economic and environmental implications of the use of environmental taxes and charges in the EU and its member states, April 2001 Extract 4: Water conservation tax in Singapore To encourage water conse rvation and price water based on its scarcity value, the Water Conservation Tax (WCT) was introduced in 1991. The WCT is imposed as a percentage of the total water consumption to reinforce the message that potable water is precious from the very first drop, something which the consumers are unaware of. The WCT is pegged to a rate such that the total price of potable water would be equivalent to the cost of producing the next drop of potable water from the next available sources which are more expensive (i.e., from desalination and NEWater). Adapted from: Singapore Public Utility Board, accessed 26 August 2014

5 Extract 5: Water rights trading Water rights trading are where rights to extract groundwater are tra ded from one person to another. The transferred rights are usually set out in a new extraction licence. We are encouraging trading because it allows us to allocate our water resources in a way that meets demand and supports the environment without the extraction of additional water. Adapted from: Environment Agency, Managing water abstraction, May 2013 Extract 6: The concept of virtual water Virtual water describes the water used to produce products that are traded i n international markets. The virtual water concept supports the argument that water -scarce countries can save their scarce water resources by relying more on import of food. As these countries are water - scarce, the opportunity cost of producing agricultural products, which require a lot of water, is high. On the other hand, the opportunit y cost of producing manufactured goods, which require less water, is low. However, the idea is not perfect. The concept implicitly assumes that the potable water which is released by reducing a high water use activity would necessarily be available for u se in a less water-intensive activity. Adapted from: Wikipedia, accessed 5 July 2014 Questions (a) Using Figure 1, (i) compare the global water consumption in 2000 with the projected trend in 2050 for OECD and BRIICS countries. [1] (ii) identify two main components which account for the difference stated above. [2] (b) Explain the likely impact of a tax on groundwater on the market for potable water. [2] (c) With the aid of diagrams, (i) explain why the Dutch government intervened in the market for extraction of groundwater. [4] (ii) explain why the Singapore government imposed a water conservation tax. [3] (d) With reference to the data, to what extent is the trading of water rights effective in achieving an efficient allocation of resources? [8] (e) Extract 6 suggests that water -scarce countries should rely more on import of agricultural products. Assess if moving to a world pattern of trade that is based upon this concept can reduce the problem of scarcity. [10] [Total: 30]

6 Question 2 Creeping Protectionism Extract 7: The protectionism that wasn’t “When it comes to international trade, actually it’s not the Great Depression, it’s worse.” So said Paul Krugman in 2009. Global mar kets were certainly rattled by the financial crisis. Trade plummeted, credit seized up, investors became nervous and consumers tightened their belts. Economists like Mr Krugman were worried that the world was repeating the mistakes of the 1930s. As the world entered the Great Depression of the 30s, countries stopped trading. Import barriers were imposed by the dozens. Governments were under the impression that protectionist measures would save domestic jobs. But the doom -mongerers might be pr