PJC H2 Econs H2 Prelim paper 2008 paper 1

Candidate Name: __________________________ CT Group: ______ Index no. : ______ ECONOMICS 9732/01 Higher 2 Paper 1 Thursday 11 SEP 2008 2 hours 15 mins Additional materials: Answer paper INSTRUCTIONS TO CANDIDATES Do not open this booklet until you are told to do so. Write your name, CT group and index number in the spaces provided on all the answer papers provided. Answer all questions. Begin Question 2 on a fresh sheet of paper. At the end of the examination, you will be required to hand in your answers to Question 1 and Question 2 separately. The number of marks is given in brackets [ ] at the end of each question or part question. You are reminded of the need for good English and clear presentation in your answers. 1 This question paper consists of 7 printed pages (inclusive of this page) PIONEER JUNIOR COLLEGE JC 2 PRELIMINARY EXAMINATIONS 2008

Answer all questions Question 1: Energy Markets Extract 1: European energy markets The European commission yesterday warned the 25-EU countries of the impact of rising prices in the energy market. Some of the challenges raised include climate change and shortage of oil supplies on its energy market. It said Europe, along with the rest of the world, faced "serious consequences" from global warming as energy consumption and carbon dioxide (CO 2) emissions continued to rise. The Commission has implemented policies like energy taxes. In addition, the commission is placing greater emphasis on greenhouse gas emissions trading in an attempt to meet the targets set in the Kyoto Treaty. In this system, government issues carbon credits to different firms. Firms can then sell off these carbon credits if their energy usage releases less CO 2 than the designated amount. Firms that cannot reduce their CO 2 emission at a low cost will then purchase the carbon credits in the market. The price of carbon credit is determined by the price mechanism. According to EU Commissioner for Energy, emissions trading will do the job. Without the market incentives implied in trading, companies would rather pay the hefty tax than reduce emissions. Going through carbon taxes can create funds, but there is not much private sector involvement. “Levels of greenhouse gases would be much higher without current efforts to cut emissions. However, several countries within the EU-15 are not doing enough and could jeopardise the collective effort of the entire EU,” said Executive Director of the European Environment Agency. The rising concern about the oil shortage has also sparked off an intense debate over its impact on Europe's economy. On the one hand is a longstanding project led by the European Commission designed to liberalise the market and enable producers and distributors to compete freely within and across national borders. On the other is a camp that argues with growing confidence that long-term security and stable prices can best be preserved in managed national markets that are dominated by strong monopolistic companies. It may be no coincidence that many of continental Europe's biggest energy groups favour this argument— after all, the less competition there is, the higher prices can remain. The EU commission is determined to use its powers as watchdog of mergers, antitrust and state aid to get the market to work in the energy market. The commission can fine firms up to 10% of total sales for anti-competitive behaviour. But so far, despite evidence of infringements, the commission has yet to fine an energy company. Source: Adapted from The Economist, Feb 9th 2006 and The Guardian, March 9th 2006, EEA and European Energy Forum website Extract 2: France backs Gaz de France, Suez merger The French government gave its blessing to a merger of state-controlled Gaz de France and private utility group Sue despite being accused blo cking a takeover of Suez by Enel, Italy's leading utility. 2

France's government, which is flying the flag of "economic patriotism" at a time of increasing globalization, risks angering the European Commission and World Trade Organization because of concerns that its action goes against the spirit of free movement of capital. Defending the strategic value of the merger, Suez chief executive said: "By merging, Suez and Gaz de France would have greater purchasing power in gas in Europe and would thus be in a better position to negotiate with suppliers. Not only would consumers benefit but France would be able to enjoy a stable supply of gas." Source: Adapted from CNN Money, February 25th 2006 and The Guardian, June 15th 2006 Extract 3: Singapore’s Electricity Market By 2001, the electricity market reforms were completed and the National Electricity Market of Singapore (or NEMS) was launched in 2003 to further enhance competition and market efficiency. NEMS is designed to promote the efficient supply of competitively-priced electricity, opened the energy retail market to full competition and encourage private investment in Singapore’s power system infrastructure. The electricity industry plays a significant role in the Singapore economy. With its history of rapid growth and expanding demand for domestic and commercial energy, Singapore is very reliant on an efficient and modern electricity system. The reliable supply of electricity, at a competitive price, influences the ability of Singapore industry to compete domestically and internationally, which in turn has a direct impact on the national economy. It was revealed that the government’s decision to introduce competition into the electricity market has reaped results. Singapore’s ranking for electricity price competitiveness has improved 13 places from 2001 to 2005 in an Inte rnational Price Competitiveness Ranking. In addition, while fuel oil prices have increased by about 100 percent over the last three years, electricity price in Singapore have risen by only about 27 percent over the same period. Source: Adapted from Introduction to Singapore New Electricity Market, EMA, Jan 2006 and Speech at EMA FORUM “PLUGGING INTO SINGAPORE”, 7 AUGUST 2006 Figure 1: Singapore Market: Fuel Oil (S$) vs Electricity Price Adapted from Singapore Power Website Electricity Price Fuel Oil Price Electricity Price 3

Figure 2: Total EU-15 greenhouse gas emissions in relation to the Kyoto target (Source: European Environment Agency, 2006) *The Kyoto Protocol is the world's first treaty to attempt to address global warming by limiting greenhouse gas emissions. It is an agreement where most developed countries pledged to reduce their emissions by agreed amounts. *CO2 is a dominant greenhouse gas (GHG). Questions (a) (i) Compare the trend of fuel oil price with the electricity prices in Singapore over the period shown. [2] (ii) Explain any difference observed in a(i). [2] (b) In light of Extract 1, use supply and demand analysis to explain the rise of energy prices in EU. [4] (c) Explain how the carbon dioxide emission is a cause of market failure. [4] (d) Comment on the policies used by EU to reduce greenhouse gases. [8] (e) In light of the data provided, critically examine how the different attitudes towards large firm in the energy markets of France and Singapore would affect their households, businesses as well as the economy. [Total: [10] 30m] 4

Question 2 Extract 4: ASEAN aims to set up single market by 2015 ASEAN1 economic ministers aimed to form a single market by 2015, five years ahead of schedule. They are also reviewing ongoing trade liberalisation in goods, and will push for the services sector to be liberalised by 2015 as well. Under a single market, goods would flow freely across borders and curbs on fl