VJC_H2_ECON_P1_MARK_SCHEME

2011 VJC JC2 H2 Economics Prelim P1 (Mark scheme) CSQ 1 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 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 pa yback 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 the right price on water ” (Extract 2) achieve the two microeconomic objectives of efficiency and equity? (8) Balance between goals of efficiency vs equity expected especially for a necessity where issues of affordability need also to be considered Explain how ‘right’ price on water can achieve efficiency If left to market forces, only private benefits and costs are considered (MPB = MPC): - Price regulates quantity demanded (prevent wastage) to truly reflect MPB - Price regulates quantity supplied (affected by pollution which raises marginal cost of production) to truly reflect MPC - Price incentivise investments through rewarding profits (price vs cost) Explain how ‘right’ price not possible via market system without govt intervention due to externalities (pollution costs, wastage, lack of investments) - 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 mark