HCI H2 ECONS CSQ1 ans

HWA CHONG INSTITUTION C2 Preliminary Examination 2016 Higher 2 Economics Case Study Question 1: The Coal Industry and Housing Market in the United Kingdom (UK) Suggested Answers (a) With reference to Extract 3, explain why the value of the price elasticity of supply of new housing in UK might change over time. [3] Define PES [1m] If there is no definition given, the idea of how responsive quantity supplied will be to a change in price must be captured in the student's explanation to get 1m. State + Explain that in SR: PES<1 [1m] Need time to build houses and in the short term, there is a "lack of materials and labour… bricks running out… construction workers left the industry"  lack of spare capacity State + Explain that in LR: PES likely >1 [1m] Availability of materials and spare capacity as "brick makers reope n plants" and skilled workers as former military personnel join the construction industry and training schemes help to train them to become skilled workers. (b) With reference to Table 1, explain whether the pricing policy by the electricity company could be considered an example of price discrimination. [4] Explain that the different prices charged for the usage of electricity could be due to 3 rd degree price discrimination: [2m] - Define PD  charging different prices (day vs night) to different groups of consumers (day vs night) for the same product (electricity) due to reasons not associated with cost differences. - The different prices charged could be due to di fferences in price elasticity of demand. Day prices are higher as demand for electricity is more price inelastic due to higher degree of necessities in the day time where electricity is required for the functioning of the economy when most people are awake, e.g. business and production activities, school, households etc. Night prices are lower as demand is more price elasti c due to lower degree of necessities. Most activities are not essential to be conducted in the night when most people will be resting. Explain that the different prices charged could be due to differences in costs: [2m] - During the day (peak), demand for electricity is higher, leading to higher marginal cost incurred and hence higher prices are charged. - During the night (off-peak period), nuclear and coal-fired stations, with lower operating costs, will be used. However, during peak period, power stations with higher operating costs (e.g. oil- fired stations) will have to be activated. (c) Using the information in Table 1, account for the difference in average house prices in London and Yorkshire. [3] Price difference likely due to differences in demand and supply: London has a higher average house price because: Higher demand due to higher annual income earned (£79,000) leading to higher purchasing power and higher population (8.5m) + Lower supply due to lack of land in the capital (1,572km 2) available for building new houses. Yorkshire has a lower average house price because: Lower demand due to lower annual income earned (£49,000) leading to lower purchasing power and lower population (5.4m) + Higher supply due to l and available outside of the capital (15,420km 2) for building new houses. Demand factor [1m] Supply factor [1m] Account for difference [1m]

(d) Explain the type of unemployment that might arise due to the closure of the two coal pits. [2] Structural unemployment [1m] as the mining industry is in a decline and the miners might not have the skills to work in expanding industries that require higher skills (since mining involves more manual labour). [1m] Note: Cyclical unemployment not accepted as the impact on the whole economy will be too small given that only 1300 workers will be affected. (e) Discuss the factors that the UK government should consider in deciding to redevelop the coal industry. [8] Possible factors: Comparative Advantage + Impact on Macro Goals If the government decides to redevelop the coal industry, it would have to consider whether the industry would be able to gain comparative advantage in mining coals. According to Extract 2, the UK "sits atop significant coal resources… enough to provide power for 300 years" and used to produce lots of coal in the past. Hence the UK has the factor endowment in coal and the expertise and she might be able to produce coal at a lower opportunity cost than other countries. If successful, X increases and M falls significantly (since UK imports more than 75% of its coal requirements – Extract 1)  BOT improves, BOP improves, ceteris paribus. AD increases leading to multiple increase in national income. Employment increases too. (Evidence: Extract 2 "potentially thousands of jobs could be created and … source of export revenue") However, the UK might not gain comparative advantage in coal production as the competition will be fierce with cheap suppliers from Colombia, Russia, India, China, South Africa, and the US (Extract 2). Environmental Concern + Resource Allocation: If the government decides to redevelop the coal industry, it would also have to consider environmental issues. Coal is "the dirtiest fossil fuel and emits more carbon emissions" (Extract 1). Should the UK redevelop the coal industry and use it as the main source fo r electricity generation, it will increase the carbon emissions in UK (negative externalities). Explain how negative externalities result in allocative inefficiency. However, with the new CCS technology, which coul d enable the coal-fired power station to trap and pipe harmful emissions underground out to under the seabed during the production of electricity (Extract 2), the problem of negative externalities/ pollution might no longer be an issue. Evaluation: Even though the CCS technology can reduce the problem of pollution during the production of electricity, it does not help to cut down the carbon emissions during the extraction of coal. Strategic Reason: "Getting coal off the grid… makes energy more expensive… lose the diversity of the generation mix… security of supply and affordability have been placed behind carbon emissions target" (Extract 1)  If the UK no longer produces coal, it will need to depend on other countries for the resource, making it more vulnerable to external changes (possible impo rted inflation, supply shoc ks). And if it no longer uses coal to generate electricity, it is more vu lnerable should there be any supply shocks to the other energy sources. However, given that many countries produce coal (E xtract 2: Colombia, Russia, China, and the US), the UK could always turn to other countries should th e countries it imports from suffer high inflation or have supply shocks. Conclusion The UK government is unlikely to redevelop the coal industry as the coal industry is unlikely to gain comparative advantage even though it has significant coal resources. Extract 2 implied that even with the CSC technology, the "future for the British industry… won't be mass ive… 10 million tonnes a year", which is lower than the current output. Moreover, the coal industry "is urging the government to require domestically-produced coal to be used in future CCS plants". This implies that the coal industry will require protectionism in future, which means the domestic product is unlikely to be produced at a lower opportunity cost than other countries.

Or any well-justified conclusion Mark Scheme L3 (6-8) Balanced and well developed economic analysis, based on the case material with evident evaluation and judgment. 2 factors are enough. However, to earn top L3 marks, must have considered both macroeconomic aims and environmental concern. L2 (4-5) Answers tend to be lopsided (i.e. did not cons ider the drawbacks) or there is insufficient use of economics analysis. Little or no evaluation/judgment.