MJC_H2_ECON_EQ3

MJC_Preliminary Examination _H2_Essay_Q3[Type text] (3) To solve income inequality, the USA usesa minim um wage law while Singapore believes that improving the skills of workers is thebest solution. a) Explain why income inequality is a source of mar ket failure. [10] b) Using economic theory, analyse whether the above view is justified. [15] a) Government intervenes when the market fails. Explain what is meant by market failure: /barb2right Occurs when the market mechanism fails to allocate resources efficiently and equitably . Efficiency - Productive efficiency o Occurs when firm use the least cost method of produ ction to produce and incur the lowest unit cost of production. Productive inefficiency occurs when the firms produ ce the quantity corresponding with the minimum point of LRAC curve. - Allocative efficiency o Right amount of the right kind of goods is produced . o Occurs when firms set price = MC. /barb2rightEquity /barb2right/barb2right /barb2right/barb2rightFair and just distribution of resources Introduction Development 1: Explain why govt. intervenes in the case of income inequality Iii) Explain how Income inequality results in inequity and hence mar kets fails - Because income and wealth are unevenly distributed /barb2rightpeople with most income and wealth will be able to determine what should be produced as they are able to cast hi gher money votes for the goods that they want /barb2rightresources will be diverted to produce luxury goods for the rich, whil e the needs of the poor will not be satisfied - Unfair distribution of resources /barb2rightinequity /barb2right society's welfare not maximised Govt. intervenes in such markets due to income ineq uality /barb2right results in inequity /barb2rightmarkets fail i) Explain how Income inequality may arise due to the interact ions of forces of demand and supply of labour. ii) Explain how Income inequality may also arise b ecause of market dominance. Illustrate with market dominance diagram, showing profits of monopoly firms

MJC_Preliminary Examination _H2_Essay_Q3[Type text] Knowledge, Application, Understanding and Analysis L3 For a well-developed explanation and relevant analysis of the causes of income inequality and how income inequality results in market failure. 7-10 L2 For an underdeveloped explanation which describes the causes of income inequality with the links unexplainedand/or with conceptual errors. E.g. focusing only on how income inequality results in m arket failure without linking to the causes of income inequality like fac tor immobility or market dominance 4-6 L1 A descriptive answer which showssome knowledge abou t market failure and income inequality. Answers contain inaccuracies . 1-3 Conclusion: Because of the unfair allocation of resources /barb2right need for govt to intervene through various polici es to cor