CJC 2008 H2 Economics Prelim Paper 1

CJC Prelim 2008 CATHOLIC JUNIOR COLLEGE JC 2 PRELIMINARY EXAMINATIONS 2008 HIGHER 2 ECONOMICS 9732/01 Paper 1 9 th September 2008 2 hours 15 minutes DO NOT OPEN THIS BOOKLET UNTIL YOU ARE TOLD TO DO SO INSTRUCTIONS TO CANDIDATES 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. Answer all questions. Begin each question on a separate sheet of paper. Remember to write your name and class on every sheet of paper submitted. This question paper consists of 7 printed pages.

CJC Prelim 2008 2 Answer all questions. Question 1 The Illegal Drug Market Extract 1: The Drug Market in the USA In the United States, as in most other countries, markets for drugs are heavily regulated. Drugs intended for medicinal purposes must be approved by the Food and Drug Administration, and psychotropic drugs with questionable medical benefit are often banned. Drugs like methamphetamine, cocaine, heroin, marijuana and LSD are deemed by the government so dangerous to users and society that their possession, use or sale is a criminal offense. Making a product illegal does not eliminate the market for it. The Office of National Drug Control Policy estimates that Americans spent about $65 billion on illegal drugs in 2000, more than the amount spent on cigarettes. www.minneapolisfed.org Extract 2: The Cost of Cocaine in Europe and the USA Despite being much nearer to the main coca-producing countries in South America, the price paid by American consumers for a gram of cocaine, at $86.40, is pretty close to the $94 paid in Europe. Stricter anti-drug policing in America may be a factor in keeping the cost high. The margin between the wholesale and retail price in America is higher than that in Europe. www.economist.com, 14 July 2008 Table 1: Cocaine – Wholesale & Street prices Europe 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Retail Price (US$) 180 170 169 145 152 157 135 116 113 106 82 85 80 92 94 89 Wholesale Price (US$) 105 77 82 61 64 64 61 55 54 47 42 41 40 46 50 49 USA 1990 1991 1992 1993 1994 1995 1996 1997 1998 19 99 2000 2001 2002 2003 2004 2005 Retail Price (US$) 284 262 245 205 186 174 162 159 154 142 151 111 96 82 93 107 Wholesale Price (US$) 70 71 69 62 57 51 46 43 40 37 35 24 26 24 24 21 Source: World Drug Report 2007 Extract 3: The Social Herbicide – The Use of Subsidies to Reduce Supply of Coca The government of the United States has adopted policies aimed at decreasing the quantity of illegal drugs bought and sold in the United States with both programs that reduce supply and those that reduce demand. In 2000, the United States gave $1.3 billion in aid to finance Plan Colombia, (“Plan Colombia”) an operation that would seek to reduce the supply of cocaine at its source by curbing the production of the coca plant. Two main strategies have been employed:

CJC Prelim 2008 3 spraying herbicides on coca fields and giving subsidies to coca farmers who voluntarily replace their coca with other crops. One way in which authorities have tried to reduce supply of cocaine is through spraying a glyphosate-based herbicide over areas where coca is grown. In 2001 and 2002, Colombian authorities and American contractors sprayed herbicides on 254,586 hectares of coca. However, this strategy is inefficient and not cost effective. Although their fields and crops may be destroyed once, there is a high incentive for coca farmers to move elsewhere and replant the illicit crop there as growing coca is a very profitable enterprise. It is four times more profitable than even the most profitable legal crops, oranges and avocados. Another strategy used in Colombia to combat coca production is giving subsidies for crop substitutions. Under this program, the Colombian government (with American aid) provides up to $2,000 in subsidies, technical assistance, and seeds to each family who voluntarily destroys its illicit crops and substitutes legal crops such as rice, corn, and fruit. Adapted from Joshua Mollner, Saint Thomas Academy, Mendota Heights, Minnesota www.minneapolisfed.org Extract 4: Drugs in the Andes – A Big Rise in Coca in Colombia It is almost a decade now since the United States and Colombia launched a joint plan to cut the output of coca (the raw material for cocaine) by 50% in six years. Plan Colombia has been effective as a counter-insurgency exercise, helping to beat back guerrillas and paramilitary warlords. But it has been a relative failure when it comes to coca. According to a survey by the United Nations released this week, the area under coca in the three main producing countries increased by 16% last year to the highest figure since 2001 (see chart). The bulk of the increase came from Colombia (up 27%), though cultivation there is still almost two-fifths below its peak in 2000. Figure 1: Coca Cultivation

CJC Prelim 2008 4 This is despite superhuman efforts by Colombia's government to wipe the crop out. President Álvaro Uribe first unleashed American aircraft to spray weedkiller on the coca fields (153,000 hectares, or 378,000 acres, in 2007 alone). But the spraying hit food crops, and was not very effective. So the government has backed it up with manual eradication. Last year, gangs of labourers ripped out 67,000 hectares of coca. But the UN survey shows much new planting near the Pacific coast, well away from the drug heartland in the south-eastern lowlands. Much of it is in smaller fields that are harder to detect. www.economist.com, 19 July 2008 Table 2: United States Cocaine Use in Lifetime (Numbers in Thousands) 2006 2005 2004 2003 2002 TOTAL 35,298 33,673 34,153 34,891 33,910 Male 20,668 20,388 20,562 20,988 20,325 Female 14,630 13,284 13,591 13,903 13,585 Age: 12-17 570 582 611 648 670 18-25 5,130 4,905 4,755 4,893 4,786 26 and Above 29,598 28,185 29,488 28,649 2 8,453 Source: OAS Questions a) i) Compare the trend in retail cocaine prices in Europe and the USA from 1990 to 2005. [2] ii) With reference to the data and using economic analysis, account for the trend in retail cocaine prices observed above. [4] iii) Account for the difference in wholesale prices of cocaine between Europe and the USA. [2] b) i) Explain the market failure created by drug abuse. [4] ii) Evaluate the use of a ban on illegal drugs to correct this market failure. [6] c) With reference to the data, discuss the effectiveness of “Plan Columbia” and suggest alternative measures the government could adopt to bring about a more efficient allocation of resources. [12] [Total: 30]

CJC Prelim 2008 5 Question 2 The Vietnam Economy Extract 5: Vietnam's annual inflation rate has soared to 19.4% year on year in March, from 15.7% in February, hitting double-digits for a fifth consecutive month. Food-price inflation, which holds around a 40% weighting in the consumer price index and has been accelerating rapidly since mid-2007, continues to be the main factor driving up the general price level. Inflationary pressures have also been amplified by large capital inflows that have increased the money supply. The government's expansionary fiscal policy stance, combined with the central bank's inability to rein in credit growth thus far, has exacerbated the problem. Vietnam's government is acutely aware of the challenges rampant inflation poses to the country's economic and social stability. In the past few weeks it has unveiled a raft of measures designed to dampen inflationary pressures. The government has begun to target consumer price inflation aggressively. In March it lowered import duties on certain products, raised interest rates and