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 additional unit of good)  Price regulates quantity supplied (f irms will have the incentive to invest in infrastructure due to profit motive ) to truly reflect MPC - Hence MSB = MSC Explain how putting a price on water may not achieve efficiency - Market unable to capture cost of negative externality (pollution)  right ‘price’ is lower  Lower ‘price’ leads to wastage in consumption  Lower ‘price’ may not be sufficient to induce investment in water management technology that bring about lower cost of provision in the future  Pricing through market is not efficient (MSB ≠ MSC) Therefore the “right” price should take in to account external costs that are not captured in the market system to achieve efficient allocation of resource. Explain how government intervention vi a tax could achieve a more efficient allocation of water resource (raise ‘price’ of water & curb excess consumption).

However, to cater to the poor, subsidy is given. L3 Able to evaluate how putting a tariff may achieve efficiency with reference to the data. 5-6 L2 Able to explain how putting a tariff may OR may not achieve efficiency (largely 1-sided) Or Able to evaluate how putting a tariff may achieve efficiency. 2-sided but with some gaps in the answer 3-4 L1 Able to identify the various measures used with little explanation and without clear idea on whether they are DD or SS targets 1-2 d Distinguish between the concepts of ‘ shortage’ and ‘scarcity’. (4) Shortage is a situation when the qty dd > qty ss at the existing market price. [1] Scarcity is a situation when limited resources are not able to satisfy unlimited wants. [1] Explain how shortage can be eliminated through adjustment when price changes but scarcity can never be eliminated. [2] e Examine the relative effectiveness of the methods adopted by countries to tackle the problem of shortage of clean water. (8) Identify govt intervention methods: subsid ies, tariffs, regulations, SS-side measures to boost access Measures identified How they work / evaluation Applied in Developed countries Applied in Singapore 1. Curb Demand - Tariffs Tariffs raise the price of water  reduces quantity demanded  most direct means  not targeted  poor may suffer more (equity issue) Tariff account for less than 1% of household income despite highly inelastic DD (extract 2); subsidies in other countries to help poor Figure 2 shows water tariff (including wastewater) for Sg highest in selected countries High water taxes used (extract 3)

- Education - Use efficient technology Change mindsets via education and campaigns  reduce wastage, improve conservation  reduce DD  takes time for habits to change  more difficult for larger country Adoption of newer and more efficient technology to reduce water usage  reduce DD  high costs involved initially  needs incentives  usually govt initiative / coercion / regulation Extract 2 mentioned DD management could reduce need for expensive water projects but does not show any material evidence for other countries Extract 2 mentioned development of technology for water provision – not about reducing DD Extract 3 – “exhorted to conserve every drop” is evidence of water conservation campaign  high level of reach to the general populace given the smaller size and higher population density Extract 3 – “DD is curbed…efficient technologies” suggests use of means to reduce usage (eg. Water reduction taps; push-release taps; water saving cisterns etc) 2. Boost Supply - Reduce pollution - Import Lower pollution levels  ground and surface water can be used  cheaper clean water  need for regulation on pollution abatement  assignment of property rights for polluters to take responsibility  clean-up costs vs ‘punishment’ Buying water from neighbouring countries  (Extract 2, para 3) “increasingly paying true cost” – shows government policy options (tariffs) to provide incentive to waste less, pollute less and invest more in water infrastructure;more prevalent in countries with large natural sources of water Not applicable for countries with large sources of natural Figure 2 shows high wastewater tariff imposed by Sg but little else regarding curbing pollution; perhaps since we have little natural water sources Traditional source but contracts are running out

- Build reservoirs - Desalination - Conservation (recycle) increases SS  but reliance on foreign source  strategic dependence / political ties Building reservoirs  increase SS  high costs involved, land sites needed  high opportunity cost for alternative use of land D