SRJC H1 ECON P1 ANSWER

1 © SRJC 8819/01/JC2PreliminaryExam/11 Section A Question 1 Suggested Answers (a) Using Figure 2, (i) Summarise the variations in the stockpiles of wheat. [2]  The stockpiles of wheat are expec ted to increase overall. (1m)  The stockpiles fell from 2007 to 2008, rose from 2008 to 2010 and are expected to fall thereafter. (Any two variations – 1m) Markers’ Report Data interpretation:  Candidates need to be more careful with data interpretation. E.g. o “There is an overall rise in stockpiles from 2007 to 2010” - this statement is not given full credit because the entire period runs from 2007 to 2011. Hence, the statement should be rephrased as “There is an overall rise in stockpiles from 2007 to 2011”. (ii) Account for the abovementioned variations. [2] Stockpiles of wheat depend on the global consumption and global production of wheat (0.5m) – For example, when global consumpt ion was less than global production from 2008 to 2010, the stockpiles rose. However, when the global production is expected to dip below global consumption from 2010 to 2011, the stockpiles are expected to fall. 1.5m – 1m for why stockpiles rose (fell) and 0.5m for why stockpiles fell (rose) Markers’ Report Question interpretation:  Candidates should take note that they are instructed to use Figure 2 to answer (ii) as given in the question. (b) With the aid of a diagram, analyse why prices of food commodities are expected to surge and remain volatile. [5] The export ban by Russia reduces the world supply of wheat (Extract 2). Additionally, Russia is one of the top producers of wheat in the world (Figure 1). Besides that, the rise in demand for biofuels (Extract 1) leads to a rise in the derived demand for food commodities such as rice and wheat which are factors of production for biofuels. shortage Price Quantity of food commodities P1 Q0 S1 D0 0 S0 E0 E1 P0 Q1 D1 Q3 Q2

2 © SRJC 8819/01/JC2PreliminaryExam/11 The fall in supply will shift the supply curve to the left from S 0 to S 1 and the increase in demand will shift the demand curve to the right from D 0 to D 1, causing a huge shortage of Q2Q3 at the original price of 0P0. Eventually, a new market equilibrium is reached at point E 1 where quantity demanded will once again be equal to the quantity supplied. In this instance, there is a surge in the price of food commodities from 0P 0 to 0P1. Volatility in the price of food commodities could be explained by the unpredictable changes in the demand for and supply of food commodities. In other words, when the demand for and supply of food commodities fluctuate, the price of food commodities would fluctuate as well. L2 3-5  Good application of demand and supply analysis with detailed reference made to a diagram  For 4m and above: Detailed explanation that takes into account simultaneous changes in demand for and supply of food commodities or application of relevant elasticity concept  Detailed explanation without accounting for the volatility in prices – max. 4m L1 1-2  Smattering answers  Glaring inadequacies are evident, e.g. incomplete diagram and incorrect explanation of the price adjustment process Markers’ Report Question interpretation:  Some candidates did not respond to the question, i.e. they did not explain why there would be a large rise in price of food commodities. This is despite drawing a diagram that illustrates both a rise in demand for and fall in supply of food commodities. In this case, the candidates should have commented that when demand rises and supply falls, there is a large shortage at the original equilibrium price. Hence, there would be a steep rise in the price of food commodities. (c) (i) Discuss how the Australian government could intervene to reduce carbon emissions. [8] Explain and evaluate two measures given in the case study:  Tradable pollution permits are rights to firms to buy or sell pollution in artificially created markets. Firms can thus bid for a permit that allows them to create a fixed amount of pollution.  The market for permits will reach a market clearing price where the marginal benefit of pollutant emissions are equal. Businesses can either buy permits or invest in technology to reduce pollution emissions, depending on which approach saves them money.  In due course, when the government can reduce the supply of pollution limits, the total amount of pollution allowed can be reduced. This will make the permits more valuable, and thus more advantageous to firms that can reduce pollution levels at the lowest marginal costs. Evaluation If the quantity of permits is based on current production levels, there may be no advantage for firms that have already taken steps to control their pollution emissions. The government could also invest in green technologies that reduce carbon emissions.

3 © SRJC 8819/01/JC2PreliminaryExam/11  For example, the Australian government c ould spend on R&D that reduces the sulphur content in fuel used by industries. Additionally, the government could subsidise the R&D efforts undertaken by private enterprises such as the development of machines that could run on biofuel instead of fossil fuel and electric cars. Evaluation The main problem with investment in green technology could be the ability of the government to finance its own R&D efforts or those undertaken by private enterprises. This increase in government expenditure could potentia lly cause the government to suffer from a budget deficit that may require it to raise taxes in the future. The Australian government could impose a regulation that stipulates an expanded renewable energy target.  For example, it could set a higher target for the use of renewable energy such as solar and tidal energy.  Note that this measure should not be implemented by itself; it should be complemented by other measures such as investment in green technology. This is done so that firms would have the means to meet the higher target. Evaluation The advantage of the expanded renewable energy target is that it is simple and clear to understand. It could also be relatively easy to administer. Government officials could conduct checks to see that the firms do not fall short of the target. Conclusion: There are various ways in which the Australian government could adopt to reduce the level of carbon emissions. It is important for the government to implement both short-term and long-term measures that would complement each other. L3 7-8  Competent discussion of two measures taken from the case is evident; one of which has to be tradable pollution permits  Informed conclusion is provided; without conclusion – max. 7m L2 4-6  Some explanation and evaluation of two measures to reduce carbon emissions are evident  Two measures from the case are discussed but quality of discussion is not consistently good  Competent discussion of two measures – one from the case and one from supplementary knowledge, e.g. tax – max. 6m L1 1-3 Smattering explanation of measures with limited evaluation Markers’ Report Question interpretation:  Some candidates only explained how the meas ures work to reduce carbon emissions without evaluating the effectiveness of these measures. (ii) Comment on the impact of reduction in carbon emissions on economic growth. [5]  Carbon emissions could be reduced by cutting down on the use of fossil fuel. This could mean that the level of production is reduced in the economy. As a result, there would be a reduction in real national output, which means that economic growth would fal