VJC_H2_ECON_P2_MARK_SCHEME

2011 VJC2 JC2 H2 Economics Prelim P2 Mark Scheme Essay 1 As the world experiences soaring internationa l oil prices, countries like Malaysia and Indonesia have provided fuel subsidies while Singapore and Australia have not. Discuss the impact of soaring international oil prices and fuel subsidies on society. [25] Approach: Candidates should recognise that soaring internat ional oil prices can be explained using a Demand/Supply/elasticity (DSE) framework. Although not explicitly required by the question, the possible DSE reasons for soaring international o il prices should be briefly explained/described (as it may have some bearing on the impact on the various sectors of the society). Candidates must use the DSE framework and welfare co ncepts (consumer and producer surplus) to evaluate how society, broadly (1) crude oil producers (e.g. oil producing countries, oil producing firms etc), (2) crude oil consumers (e.g. oil refi ning firms, manufacturing industries, consumers of processed fuel – households and firms etc) wi ll be impacted (negatively or positively) by soaring oil prices. Clear illustrations using clearly labelled diagrams and good examples are a requirement for strong marks. Strong candidates might even differentiate the analysis further by evaluating how the impact on specific groups within a broad group might be different (e.g. low- income vs high-income households, manufacturing sector vs service sector firms). As the question hints that some countries (government s) have implemented fuel subsidies, candidates must evaluate (using the DSE and welfare/efficient concepts) how the fuel subsidies (e.g. price ceiling, subsidies) might have affected the respective impact on the various sectors (include government) of the society. Therefore, diagrams and examples showing fuel subsidies measures must be included. Possible concepts/discussion to be applied (do not need all to score full marks) - Soaring international oil prices o DD, SS, Ep, Es factors - Impact of soaring international oil prices on producers and consumers (and some governments and workers) o Net oil exporter countries (government) vs net oil importer countries o Oil producing firms vs oil consuming firms o High oil-dependent firms vs low oil-dependent firms o High oil-dependent households vs low oil-dependent households o High-income vs low-income households o P and Q, TR and TE analysis o Consumer and producer surplus o Efficiency vs equity trade-off - Impact of fuel subsidies on producers, consumers, governments, workers o Price ceiling vs subsidies o Consumer, producer surplus and government expenditure o Efficiency vs equity trade-off o Equity in distribution of government subsidies Intro  Briefly identify that soaring oil prices is due to increase in demand and fall in supply/no change in supply.  Soaring oil prices can have positive and/or negative effects on consumers (oil refining firms, oil/fuel consuming f