VJC_H1_ECON_P1_MARK_SCHEME

2011 VJC H1 Economics Prelims (Suggested answers and mark scheme) Section A CSQ1 a i. Compare the trends of projected water use in Figure 1. (2) Projected water use was rising for Manufact uring, Electricity and Domestic sectors, except for Agriculture [1] Manufacturing and Electricity contribution to water use is projected to rise more significantly [1] ii . With the aid of economic theory and ma terials provided, predict the trend of the price of water in the next few decades. (4) rising water usage (population, climate, economic growth, wastage)  DD expected to rise  shift rightwards of DD curve [1] scarce resource + limited supply, rising pollution  SS expected to either remain fairly unchanged / rise marginally (insufficient information) [1] Rise in DD > change in SS  price rise [1] Moreover, DD and SS highly inelastic  price rise (likely) more significant [1] Evidence from Extract 1 & 2 b I With the aid of an example from the data, explain what is meant by an external cost. (2) This refers to cost imposed, by the production or consumption of an additional unit of a good, on third parties who are not directly involved in the production or consumption of that good. (1m) While desalination plants can turn salt water into drinking water, greenhouse gas production and discharge of concentrated brine into the marine environment occur as well. These gas and brine production bring about undesirable climatic changes and destroy marine lives. As a result, third party effects like reduced income of fishermen or tourist industry may be hit. (2m) 1 + 2 = 2m ii Explain the economic justification for governments to intervene in the provision of water treatment. (4) Market failure from externalities

Prevention of polluting groundwater / preserve quality of available water resource  external costs  SS-side issues  welfare loss (diagram)  requires assignment of property rights or govt intervention / regulation Or Water treatment might be under-provided by the market as private enterprises may ignore the benefits of clean water on the wider community (i.e. they only care about the revenue they will recei ve). Moreover, such projects have high capital intensity, requires large initial outlay and has long payback periods that presents a challenge to private enterprises Max 2 for identification of reason (if left to market, external cost is not internalized) Max 2 for diagram to illustrate welfare loss Evidence from Extract 2 c To what extent does putting a tariff on water achieve the microeconomic objective of efficiency? (6) Explain how putting a price on water can achieve efficiency - Consider the workings of price mechanism and how it allocates resources efficiently. - Explain assumptions and how only private benefits and costs are considered (MPB = MPC):  Price regulates quantity demanded (prevent wastage) to truly reflect MPB (value that consumers place on additio