VJC H1 ECON P1

1 VICTORIA JUNIOR COLLEGE 2011 JC2 PRELIMINARY EXAM H1 ECONOMICS (REVISED) – PAPER NO. 8819/01 16 September 2011 8:00 – 11:00 am READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for diagrams. Do not use staples, paper clips, glue or correction fluid on the work that you hand in. Section A Answer all questions. Section B Answer one question. The number of marks is given in [ ] at the end of each question or part question. At the end of the examination, fasten your work securely, by question, using the strings provided. _________________________________________________________________ This document consists of 10 printed pages.

2 Section A Answer all questions in this section Question 1 Water: Scarcity or Shortage? Extract 1 Drinkable water, a basic human need, is a scarce natural resource, just like oil and gas. Water may become the most precious natural resource as the world’s population grows. Of principal concern is our failure to recognize and accept that there is a finite supply of water. Over half of the world’s population could be living in areas w here water is projected to run short by 2030. This would be a result of a number of factors such as the increased demand for food and agricultural products and the cultivation of biofuel crops. Studies have shown that demand for water increases significantly as the world population expands and economies grow, which further intensifies the competition and conflict s among water users for the limited supplies of water. Source: Adapted from various reports from World Bank, 2009 Extract 2 To mitigate and adapt to water scarcity, there have been some policy responses such as preserving or improving the quality of the available resource. This is done through enhanced pollution abatement and wastewater treatment. While most developed countries have tackled surface water pollution problems through regulation, pollution from diffuse sources continues, particularly from agriculture. Figure 1: Projected world water use: By sector

3 Another way is to manage its demand. The cheapest new source of water has often been water gained through conservation. Demand management changes the nature of needs for water supply infrastructure. Improving conservation can reduce the need for new and expensive water supply projects, which require high capital intensity, large initial outlays and long payback periods. Climate change and over-use of wa ter will mean that nearly one in every two people will live in water-stressed areas by 2030. This has given the private sector the opportunity to be involved in the development of technology for water provision. New studies say that putting the right price on water will give people the inc entive to waste less, pollute le ss, and invest more in water supply infrastructure. Indeed, households and industries in many countries increasingly pay the true cost of the water they consume to ensure that the water management is realistically financed and sustainable. This is done through water tariffs. Many developed countries have successfully reduced water use per capita in recent years. This indicates that appropriate pricing can lead to a decoupling of water use from economic and population growth. For most households in developed countries, such water tariffs are not a significant burden as they typically account for less than 1% of household income. However, in many of the poorest developing countries, water bills may represent a more significant portion of the income. Research on several countries in the last 35 years found that the price elasticity of demand estimates has a range of –0.1 to –0.2. Subsidies are therefore often justified in terms of keeping water affordable for poor households, but there is mounting evidence that they are often not well targeted and not very effective since these households are frequently not connected to water distribution and sanitation networks. Hence regulation with the relevant incentives for efficiency and fairness must be in place as human and financial resources are limited. Source: Adapted reports from Organization for Economic Cooperation and Development 2009 Figure 2: Average total water and wastewater tariffs in Asia, 2008

4 Extract 3 For years, water has been imported through three pipelines from neighbouring Malaysia. The issue is becoming increasingly acute ahead of the expiry of two long-term supply deals that guarantee deliveries of Malaysian water for less than one cent per 1,000 gallons - one until 2011, the other until 2061. As a first step, a few large reservoirs are being constructed to harvest as much rain as possible. In addition, desalination plants that turn salt water into drinking water provide 10% of Singapore's current needs. Desalination plants can provide a wide range of outputs to cater for small isolated communities or for irrigation. However, users cite energy costs and environmental issues as concerns. With greenhouse gas production and discharge of concentrated brine into the marine environment, satisfactory dilution of the concentrate needs to be achieved to avoid increasing local levels of ocean salinity to unacceptable levels, especially in sheltered waters. But the real breakthrough has come from NEWate r, a government-initiated project, produced in water reclamation plants from so-called "used" water. The plants use cleaner and more energy efficient technology to produce water that is almost as clean as distilled water. Also, as demand is curbed by high water taxes and efficient technologies, and Singaporeans are constantly exhorted to conserve every drop, Singapore has managed to find the right balances between water quantity and water quality considerations; water supply and water demand management and strategic national interest and economic efficiency. Source: BBC News; 6 May 2008

5 Questions (a) i) Compare the trends of projected water use in Figure 1. [2] ii) With the aid of economic theory and materials provided, predict the trend of the price of water in the next few decades. [4] (b) i) With the aid of an example from the data, explain what is meant by an external cost. [2] ii) Explain the economic justification for governments to intervene in the provision of water treatment. [4] (c) To what extent does putting a tariff on water achieve the microeconomic objective of efficiency? [6] (d) Distinguish between the concepts of ‘shortage’ and ‘scarcity’. [4] (e) Examine the relative effectiveness of the methods adopted by countries to tackle the problem of shortage of clean water. [8] Total: 30m

6 Question 2 Global Recession Figure 3: Growth of Taiwan’s real GDP (% per annum) Source: National statistics, Republic of China (Taiwan) Table 1: Composition of GDP of selected countries (% of GDP), 2009 Singapore Taiwan USA Private final consumption expenditure 48.8 54.6 70.8 Government expenditure 11.4 12.8 17.3 Gross fixed capital formation 27.9 18.7 14.6 Exports 198.6 69.5 11.1 Imports 186.7 55.6 13.8 Source: UN Statistics Division Extract 4 Asia in recession Taiwan has tumbled into recession, suffering a record annual fall in output at the end of last year to become East Asia’s worst-performing economy. Official data showed Taiwan’s gross domestic product shrank 8.36 per cent year-on-year in the last quarter of 2008, highlighting the exposure of Asian exporters to the slump in wor