YJC_H2_ECONS_P1_Q1_answers

Question 1: Fuel subsidies and vehicle emissions (a) With reference to Figure 1, compare the trend in carbon dioxide emissions for the European Union (EU) and China between 1990 to 2010. [2] Carbon dioxide emissions for EU was generally falling while that for China was generally increasing. (1) The extent (or rate) of fall for EU was small (or gradual) but the extent (or rate) of increase for China was great (or exponential). (1) - No marks for comparisons of LEVELS of carbon dioxide emissions. - No marks if there were no comparisons. (b) Explain what is meant by ‘tr ue costs’ (mentioned in Extract 1). [2] True costs refer to direct financial costs, spillover cost (negative externalities) and opportunity cost (next best alterative foregone). 1m for relating true cost to direct financial cost + spillover cost or opportunity cost. 1m for explaining/elaborating the spillover cost or opportunity cost. (c) With reference to Extracts 1 and 2, discuss the impact of fossil fuel subsidies on the economic goal of inclusive and sustainable economic growth. [8] Impact of fossil fuel subsidies on inclusive economic growth (3m) - Fossil fuel subsidies  production cost of fossil fuel to fall  SS curve of fossil fuel to shift right (1)  surplus at original price  fall in price of fossil fuel (1)  increase affordability to fossil fuel (an essential) for low-income households/producers  improve inclusiveness of economic growth (1) Extent of impact on inclusive economic growth (2m) - It was mentioned in Extract 2 that low fuel prices mostly benefit the better-off than the poor as the better-off consume more fossil fuel (evidence: the poorest 20% received 7% of subsidy benefit, richest 20% received almost 43%). - Therefore, the extent of improv ement in inclusiveness of economic growth could be to a small extent. Impact of fossil fuel subsidies on sustainable economic growth (3m) - Fossil fuel subsidies  MPC of consuming/producing fossil fuel to decrease  MPC curve shift down (1)  MPC’ cuts MPB at higher Qp  worsen problem of over-consumption (1)  worsen market failure  worsen sustainable economic growth (1) Extent of impact on sustainable economic growth (2m) - It was mentioned in Extract 1 that fossil fuel subsidies will lead to higher environmental costs like global warming, air pollution. Figure 1 also supports this fact with ROW’s and China’s CO2 emissions increasing exponentially.

- Therefore, the extent of worsening of sustainable economic growth is to a large extent. Analysis on direction of impact: 3+3 = max 5 Analysis on extent of impact: 2+2 = max 3 (d) With reference to the material and the use of a diagram, explain the market failure in motor vehicles usage. [5] - Motor vehicle users will equilibrate at MPC=MPB  Qp (1) - Usage of motor vehicles generate negative externalities  MPC+MEC=MSC  MSC > MPC (1) - Social equilibrium occu