CJC H2 ECONS P1 P2

© Catholic Junior College 9732/01/Prelim/11 CATHOLIC JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATIONS In preparation for General Certificate of Education Advanced Level Higher 2 ECONOMICS 9732/01 Paper 1 13 September 2011 1300-1515 Additional Materials : Answer Paper 2 hrs 15 minutes READ THESE INSTRUCTIONS FIRST Write your name, class and question number on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use paper clip, highlighters, glue or correction fluid. Begin each case question on a new sheet of paper. Answer ALL questions. At the end of the examination, fasten your work securely together. Submit each case question separately. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 7 printed pages.

2 © Catholic Junior College 9732/01/Prelim/11 [Turn over] Answer all questions. Question 1 Bus transport systems Extract 1: Bus system in Singapore The public transport system in Singapore consists of heavy and light rail systems, public buses and taxis. The rail and bus services are provided by two operators: SBS Transit Ltd and SMRT Corporation. These companies are run as private firms, within the maximum fares adjustments approved by the regulator, the Public Transport Council, with no direct operating subsidies from the government. The fares, advertisement and rental revenues earned by these firms thus cover operating and maintenance expenditure and depreciation. However, government funds the capital cost of public transport infrastructure. The two companies are expected to deliver satisfacto ry bus services to meet the mobility needs of commuters. While provision of concessionary travel for students, senior citizens and national servicemen is mandatory, the shortfall in revenue is borne solely by the operators. All buses are diesel powered rather than petrol powered. Due to their higher efficiency and reliability, diesel engines are usually the dominant power source for heavy duty buses. Petrol pump prices include taxes while diesel pump prices do not, but diesel vehicles pay a diesel tax. However, buses are exempt from paying this diesel tax. A bus monopoly can lead to deterioration of services and inefficiency, with the public suffering insufficient coverage, poor frequency, poorly maintained buses affecting safety and comfort or even high fares. The two companies are now two mutua lly-exclusive monopolies crea ted by artificially carving up the market into non-competing segments, except in the popular destinations such as the city. It merely broke up one natural monopoly into two smaller monopolies. There is only a limited amount of cross-territorial competition. But, there may be sound economic reasons for granting the two bus operators the duopoly status for bus services. First, each large operator can enjoy better economies of scale. Second, this best protects the interest of commuters along unpopular routes (e.g. less densely populated estates). Currently, the companies run these routes at affordable fares because they have the ability to balance the profitable routes with the unprofitable ones. Competition, however, is necessa ry to improve operational effici ency and quality of bus services. Wasteful competition has to be avoided and a balance must be struck somewhere in between. Ultimately, the decision should be one that does not put the commuters at a great disadvantage. Source: A P G Menon, Low CK, “Lessons from Bus Operators”, Land Transport Authority Extract 2: Bus systems in England The franchised, regulated London network is very different to the largely deregulated structure of bus service provision elsewhere in England. London Buses, owned by the government manages bus services in London. It plans routes, specifies service levels and monitors service quality. The bus services are operated by private operators. They work under contract to London Buses. This system is similar to the Singapore bus system.

3 © Catholic Junior College 9732/01/Prelim/11 [Turn over] Outside London, bus operators choose the routes and levels of service that they wish to provide on a commercial basis. Local authorities then determine where the gaps are and can choose to provide support for services to fill these gaps. Around 80% of bus services outside London are operated on a commercial basis. The remaining 20% are operated with support from local authorities, generally secured through a system of competitive tendering. Source: London Buses, Transport for London Extract 3: Bus industry competition queried The Office of Fair Trading released evidence that suggested anti-competitive behaviour may be leading to higher prices for users in England (except London). These include: • The majority of local routes are operated by a small number of large bus companies, with prices high due to fear of price war or tacit collusion • There were higher fares in areas where operators with a strong market position are not challenged by a large, well-resourced rival • Many complaints alleged "predatory" behavio ur by incumbent firms designed to eliminate competition from new entrants So-called predatory tactics can include upping the frequency of buses to "crowd out" rivals or timing buses to run just in front and sometimes also just behind a rival's buses. Buses are also known to be altering their routes to pick up long queues on other routes. It also said bus groups could hit competition by cutting fares significantly or runni ng buses for free, or by refusing to take part in multi-operator ticketing schemes to limit the scope for entry or expansion by smaller operators. John Major, of the Confederation of Passenger Transport UK, which represents the bus industry, said they would be studying the report. "Bus com panies operate in highly competitive local markets and it is always in our interests to keep prices competitive to attract passengers out of their cars and onto our services," said Mr Major. "There is a great deal of competition between bus operators, large and small, although the biggest competitor for the bus industry is the car." Source: BBC News, 20 August 2009 Table 1: Indices of Ridership (2000=100) Year Bus Ridership outside London Bus Ridership inside London Bus Ridership in Singapore 2000 100 100 100 2001 98.5 105.5 100.9 2002 97.7 113.3 98.3 2003 96.0 125.5 92.0 2004 91.0 138.7 86.3 2005 92.0 142.3 85.5 2006 94.5 154.1 87.1 2007 96.1 168.8 90.2 2008 94.8 179.3 95.0 2009 94.1 178.9 93.7 Source: Various Sources

4 © Catholic Junior College 9732/01/Prelim/11 [Turn over] Table 2: Fare adjustments from 2005 to 2008 Year 2005 2006 2007 2008 Fare adjustment 2.4% 1.7% 1.1% 0.7% Source: Public Transport Council Table 3: Household Income Changes from 2005 to 2008 Year 2005 2006 2007 2008 Change (%) 4.9% 4.9% 10.1% 12.6% Source: Singapore Statistics Figure 1: Monthly Public Transport Expenditure as a Percentage of Household Income Source: Public Transport Council Questions (a) Compare the changes in bus ridership between the three areas from 2000 to 2009. [2] (b) (i) Define price discrimination. [2] (ii) Explain whether the act of bus companies charging concessionary travel for students, senior citizens and national servicemen is an example of price discrimination. [4] (c) To what extent do Tables 2, 3 and Figure 1 support the view that bus travel is price inelastic in demand? [4] (d) In Extract 3, it was described that existing bus companies outside London conduct anti-competitive behaviour. Discuss the effectiveness of such behaviour in increasing the profits of bus companies. [8] (e) In light of the issues mentioned, discuss if