MJC H1 ECON CSQ Q1

Extract 1: Asian economies using oil subsidies In the global financial crisis, worldw ide energy consumption paused. But Asia continues to grow, despite the dour eco nomic outlook in th e United States and Europe, and so does its energy needs. Yet supply has been hit by uncertainties in the Middle East. Al though we have not seen major disruptions, prices for crude oil ar e fluctuating, ranging up to US$120 per barrel, and most predict the long-term trend will be upwards. To ensure affordability, Vietnam, Indonesia and Malaysia continue to subsidise energy, increasing government burdens as oil prices rise. Their artificially low energy prices increase waste and destroy incentives to invest in alternative technologies. Studies suggest that energy efficiency measur es can achieve at least the equivalent savings in power needs with safe, off-the- shelf technology at a much lower cost. Renewable energy currently costs more but with technological advances, may prove viable in the medium term. Source: Today Online, 27 July 2011 Extract 2: UK’s Green Revolution Thousands of new wind turbi nes could be built across t he UK as part of a £100bn investment in renewable ener gy that could create hundr eds of thousands of new "green collar" jobs, Gordon Brown announced today. The prime minister unveiled what he described as a "green revolution" and "the most dramatic change in energy po licy since the advent of nucl ear power". He wants to build up Britain's clean powe r supply in order to reach the EU-imposed target of producing 15% of the country's energy from renewable sources by 2020. In a speech to an energy summit at the Ta te Modern art gallery in central London, Brown said that the North Sea, which has passed its peak in terms of oil and gas supplies, will be turned into "the equivalent for wind power of what the Gulf of Arabia is for oil". Wind turbines will also be built inland, but with sensitivity towards local communities. The government will also sh ortly begin a new advertising campaign showing people what steps they can take to reduce their energy and fuel bills – steps such as turning appliances off rather than leaving them on standby, and fitting new shower heads. The prime minister also sa id that he was prepared to ta ke on public opinion over green taxes, insisting that a low-carbon society would not emerge from a "business as usual" approach. Source: Guardian, June, 2008

Table Year MW Extrac China result i gover n for billio The c e expens an eig concer attitude sunligh Despite energy needs emitter for poo the cou Figure 1: Wind E 2000 20 0 406 47 4 ct 3: China is to thro w in it beco m nment body ons of pou entral gov e sive, partic hth and a rns about es. China ht into elec e the infu y, China is for at lea s r of CO2, a or planning untry has b e 1: Existin nergy Cap 01 2002 4 552 a's plans f w its econ o ming one o y responsi unds of sub ernment a cularly com a tenth of climate c h is the w o ctricity and sion of c a expected st the nex t a major gr g as a sig n been left id ng World S pacity in U 2003 2 0 648 8 8 for solar p omic might of the worl d ble for ov e bsidies for nd the fiv e mpared wit the cost. hange an d orld's lea d 95% of the ash and g to remain t two dec a eenhouse nificant par le due to in Solar Ene UK 2000-2 004 200 5 88 1,35 3 power t behind a d's bigges erseeing e solar farm e major u t th coal, w h But the g d energy s ding manu ese are ex governmen dependen ades, mean gas. Also rt of power nsufficient rgy Capac 010 (MW= 5 2006 3 1,962 a national s t harveste energy poli s and roof tilities ha v hich gener lobal eco n security h a facturer o xported. nt support nt on coal ning it will , China’s p r generatin grid conne Sourc city, 1996- =Megawatt 2007 20 2,406 2, 9 solar powe rs of the s cy has fin top panels e deeme d rates elect nomic crisi ave prom p of solar p a for rene w for about 7 remain th program ha ng capacity ection. ce: The Gu -2010 Source ts) 08 2009 974 4,24 5 er plan th a sun's energ alised a p s. d sola r po w tricity for b is and in c pted a ch a anels, whi wable sou 70% of its he world's as been cr y installed uardian, Ma e: PV new 2010 5 5,204 at could gy. The roposal wer too between creasing ange in ch turn rces of energy biggest riticized around ay 2009 ws, EPIA

Figure 2: World Oil Price Index, 1996-2010 (2005=100) Source: International Monetary Fund Questions (a) (i) Compare changes in oil prices from 1996 to 2010 and existing world solar energy capacity over the same time period. [2] (ii) Using a supply and demand diagra m, account for the changes in the world price of oil. [5] (b) Explain how subsidies hinder the working of the price mechanism as seen in Extract 1. [5] (c) Using a Production Possibility Curve, analyse the macroeconomic impact of the ‘Green Revolution’ on the UK [6] (d) (i) Explain the source of market failu re in the market for renewable energy [4] (ii) In light of the data provided, if you were a consultant economist, would you recommend that the Singapore government leave the production of renewable energy to the market? Justify your answer. [8] Answers (a)(i) Compare changes in oil prices from 1996 to 2010 and existing world solar energy capacity over the same time period. [2] - Both show an overall increase over the period (Similarity, 1m) - Solar energy capacity increases throughout the period, however, oil prices had a large fall in price in 2009. (Difference, 1m) 0 50 100 150 200 250 300 Jul‐96 Jul‐97 Jul‐98 Jul‐99 Jul‐00 Jul‐01 Jul‐02 Jul‐03 Jul‐04 Jul‐05 Jul‐06 Jul‐07 Jul‐08 Jul‐09 Jul‐10 Jul‐11 Price Index Price Index (Oil)

(a)(ii) Using a supply and demand diag ram, account for the changes in the world price of oil. [6] Evidence from extract 1 Demand: Asia’s energy needs increase Supply: Uncertainties in Middle East Also possible: expectation of oil prices (can be demand/supply) Both shifts reinforce the increase in price  large increase in price of oil Evaluation PED<1: necessity, resource needed for generation of energy and many goods and services  large increase in price of oil (b) Explain how subsidies hinder the working of the price mechanism as seen in Extract 1. [4] Subsidy  lowers cost of production of energy derived from oil  supply shifts leftwards  price falls Since oil based ener gy and renewable energy are substitutes (inferred from extract 1,3)  a fall in price of one leads to a fall in demand for renewable energy  fall in price of renewable energy A fall in price of renew able energy will reduce producers’ willingness to invest in it due to reduced profitability. (c) Using a Production Possibility Curve, analyse the macroeconomic impact of the ‘Green Revolution’ on the UK [6] Possible macro impacts: 1) Actual growth due increased Investment (Evidence: 100 billion investment) leading to... 2) Increased employment (Evidence:“could create hundreds of thousands of new ‘green collar’ jobs”) This can be demonstrated by a mo vement towards the boundary of the PPC. 3) Potential growth (Evidence: build up Britain's clean power supply  infer greater developm ent of energy infrastruc ture + increased in energy resources. Also, Table 1) This can be demonstrated by an outward shift of the PPC. Because greater investment is made into th is sector, a comparison between a smaller outward shift (w/o green investment) can be also made. (d)(i) Explain the source of market fa ilure in the market for renewable [4]

energy Students will be required to identify the source of market failure  positive externalities in production and explain how that leads to the market failing. Diagram required. Evidence: “concerns about climate change” “world's biggest emitter of CO2, a major greenhouse gas“ (extract 3)