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 correct the market failure of income inequality

MJC_Preliminary Examination _H2_Essay_Q3[Type text] b) View Presented i) Minimum wage law can be used to solve income ine quality ii) Singapore believes improving the skills of work ers is the best solution. Dev: Assess the policies used to correct the income inequality i) Minimum wage laws for low -skilled workers - Form of price controls – price floor - Minimum wage law is a form of price floor. It is th e minimum price that a producer can charge for a go od or service legally and it is set above the market equilibrium price. - At We, Qe quantity of labour are employed. With min wage law on the market for low skilled workers, wa ges are set at Wf, where qty ss = Q1, qty dd=Q2 /barb2right surplus of workers /barb2rightQ1Q2 workers unemployed - For the Q1 low skilled workers who are employed, the y earn higher wages of Wf compared to We /barb2right reduces the income gap between the low skilled and the high ski lled workers. - Evaluation: i) Surplus of labour /barb2rightunemployment of Q1Q2 may result in the labor marke t /barb2right worsen income inequality as unemployed earn 0 income Evaluation:Extent of unemployment depends on the ex tent of the elasticity of the curves as well as the level of the min wage. PED + PES more elastic /barb2right greater the unemployment. Plus the size of the res ulting unemployment also depends on the extent of the size of the min w age, how high this is relative to the We. The bigger the gap between the min wage and the or iginal wage We, the greater the resulting unemployment.

MJC_Preliminary Examination _H2_Essay_Q3[Type text] ii) Education and training to improve the skills of workers - Education and training of low skilled Impact on the market for low skilled workers - Increase in skills level + productivity /barb2right DD for these workers increase - At the same time, this /barb2right reduce SS for unskilled workers /barb4right Wages increase /barb4right Higher income for low-skilled workers /barb2right reduce income inequality /barb4right Illustrate with dd/ss diagram Evaluation: - Effects will not be felt immediately as compared to other policies like price controls and as it takes time to train workers C ompare improving the sk ills of workers to minimum wage laws & assess which is a better solution In the case of SG, she relies heavily on FDIs and export competitiveness as source of growth /barb2right min wage laws may not be that effective as it increases COP reducing SG’s attractiveness as a destination for investments by foreign investors. At the same time, higher COP /barb2right reduces price competitiveness for exports /barb2right with PEDx>1 due to the large availability of substitutes, export revenue is likely to fall. Hence, use of policy like min wage law not suited for a country like SG as it might conflict with its macro goals of growth and employment. Explain which is a better solution also depends on the current economic situation , the resources available to the govt as well as the priorities of the govt. Consider how other policies that can be used to solve income inequality may be better or may complement the above policies - Govt. could also give out transfer payments to the low-income group to increase their disposable income /barb2right reduce income inequality - Govt. could also solving the inequity problem by subsidizing basic necessities like healthcare and education /barb2right allowing the lower income group to have equal access to basic services /barb2right reduce unfair distribution of resources /barb2right reducing inequity - Progressive income taxes /barb2right The higher the rate of tax, the lower the proportion of disposable income remaining, therefore allowing for more equal distribution of income.

MJC_Preliminary Examination _H2_Essay_Q3[Type text] Knowledge, Application, Understanding and Analysis L3 For a well-developed and balanced answer, showing c omparisons of both policy based on criteria and also mentions one other policy that solves income inequality 9-11 L2 For underdeveloped answer which does not address th e question fully e.g. does not show comparison with regards to the policies mentioned or an answer that lacks rigour in explanation. 6-8 L1 An answer which showssome knowledge about policies to address income inequality but does not respond to the signpost. Answers contain inaccuracies. 1-5 Allow up to 4 additional marks for Evaluation E2 For an evaluative discussion based on economic anal ysis 3-4 E1 For an unexplained judgement, or one that is not supported by economicanalysis. 1-2 Synthesis and conclusion Minimum wage laws and education and retraining to improve the skills of low skilled workers do improve income inequality and reduce mark