H2 Revision Package 2013 - Sample I Answers

H2: SAMPLE PAPER I Section A: Case Study Question (Energy Landscape) Suggested Answers (a) With reference to Figure 1: (i) Compare the trend in global oil refinery capacity with that of oil demand from 1984 to 2005. [2]  

Similarity: Both refinery capacity and oil demand were generally rising. Difference: Oil demand showed larger rate of increase compared to refinery capacity, hence causing excess capacity to decrease consistently.

(ii) Explain the likely value of the price elasticity of supply of oil.  

[2]

PES is likely to be low (< 1) / supply of oil is likely to be price inelastic Reason: Oil takes a long time to produce and the oil refinery capacity is reaching the peak, hence with a lower excess capacity, the quantity supplied is less responsive to price changes.

b(i) With the aid of a diagram, explain how the two trends in (ai) might have affected global oil price in the period 2002-2005. [3]   

Increasing demand for oil Increase in SS but likely to be smaller magnitude than increase in demand. (oil refinery capacity is still increasing but at a slower rate) Accurate diagram to show an increase in price and increase in equilibrium qty of oil

b(ii) Using demand and supply analysis, explain how a change in the price of oil will affect the market for biofuels. [4] Increase in demand  Biofuels and oil are substitutes in demand. A long term rise in oil price will push countries towards using biofuels (e.g. US and some European countries)  DD for biofuel will increase. Supply conditions  Rising oil prices may prompt governments to motivate/encourage producers towards production of biofuel as alternative fuel (Extract 2), hence increasing the supply of biofuel.  Supply may increase too as governments are pushing for use of more environmentally friendly energy (Extract 1). Diagrammatic explantion  Change in price will be dependent on which increase is larger. Having said that the increase in DD is likely to be greater than increase in SS as the technology involved in production of biofuel is not very pervasive yet  shortage  upward pressure in price of biofuel  Furthermore, supply may be price inelastic as biofuel producers have to compete with grains production for food supply, i.e. ethanol competing for corn with consumption-based uses.  Increase in demand and supply will reinforce one another and lead to an overall increase in usage of biofuel.

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(c) With reference to Table 2, explain the possible reasons for the change in primary energy consumption by fuel in Indonesia and Singapore. [3] State the changes in primary energy consumption by fuel in Indonesia and Singapore as shown in Table 2: the primary energy consumption by Singapore and Indonesia has increased. Reason: Increase in demand: [choose any two reasons]  rising affluence of the people in Singapore and Indonesia due to economic growth  increasing population  industrialisation

(d) With reference to Extract 3, explain the source of market failure in the market for biofuel. [6]    



The production of bio-fuel generates external cost such as pollution and causes global warming effects. (due to the burning of lands) But external cost is unaccounted for/uncompensated in market decisions involving use of oil. Private cost is hence lower than social cost (true amount of resources used up). Over-production results as market decisions are only based on private valuation of cost and benefit  market equilibrium > socially efficient level over allocation of resources  allocative and social efficiency are not achieved Deadweight loss is the monetary value due to this market failure. MSC>MSB at market equilibrium level of production.

(e) Using the information given, evaluate the Indonesian government’s policy of increasing the country’s palm oil production and encouraging the development of palm oil-based bio-fuel to reduce the amount of carbon emissions. [8] Why using palm oil as bio-fuel source is a desirable and viable energy policy for Indonesia: Evidence Biofuel development will contribute to easing the pressure of rising energy Table 2: consumption in Indonesia. As the economy grows over time, energy consumption  rise in total level will continue growing and without biofuel, this rise in energy demand will energy have to be met by oil, natural gas and coal. Fossil fuels such as oil and coal are consumption. emission-heavy and these contribute 68% to Indonesia’s energy supplies.  Oil and coal Biofuels will help Indonesia meet its future energy demand while curbing rise in contribute 68% air pollution. Plant-based fuels release less carbon dioxide than fossil fuels when of energy burned. supplies.

Potential drawbacks of this policy: The most controversial issue regarding palm oil as energy source is the Extract 2: environmental and habitat threats from peatland clearance and indiscriminate  EU’s pro-biofuel forest burning to make way for palm oil plantations. policy already Research showed that peat swamps are long term carbon traps, and when drained caused a surge in and dried would release this trapped carbon supply into atmosphere. DD for palm oil. Therefore, the CO2 generated from indiscriminate forest clearance peatland  Late-2006 clearance may nullify whatever efforts to reduce the amount of carbon emissions research findings through the use of biofuel. by Wetlands International.

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Furthermore, other problems could be generated in the midst of Indonesia’s effort to increase palm oil-based biofuel production and usage. Diversion of palm oil supply from food industries towards biofuel industry. Prices of food products using palm oil will rise  welfare loss for the low income which form the majority population in this developing country. Another objection which Western media have played up is the demise of orang utans in Borneo forest but Malaysian authorities have strongly countered this claim.

Other policies to reduce carbon emissions: 1. Subsidies of government to encourage the use of green technology in the industries 2. Taxes e.g pollution tax 3. Education and campaigns

Overall: 





Biofuel is a viable solution for Indonesia to help bring down pollution levels, not just in the country but also globally if Indonesia managed to export palm oil to other Western countries which are increasingly pushing for biofuel energy. What about the potential costs in terms of rising food prices? This can be offset if Indonesian government can implement certain policies like giving subsidies to the lower income people to help them cope with the rising prices. The pollution contribution from expanding oil palm plantations? Indonesia has to review its peat and forest clearance practices because in order for the developed countries to continue using palm oil and importing from Indonesia, meeting the environmental standards will be a necessity.

L3

   

Evaluative two-sided analysis, clearly supported with evidence. Gives arguments to support and against. OR Good interlinking of related arguments. Suggestions of other policies to reduce carbon emissions

L2

 

Clear explanation of both benefits and drawbacks with limited support of evidence. Gives 1 argument (developed) on each side (for and against).

L1



One sided, superficial and without reference to data.

E1

Unexplained judgment or unsupported by economic analysis

E2

Jugdement based on analysis; a reasoned conclusion based on well-considered comparison.

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H2: SAMPLE PAPER I Section B: Essay Questions 1. Recently, many industry experts have been signalling the death of print media, amid the increasing availability of books, magazines, newspapers and other printed publications on the Internet. (a) Explain how the rise of the Internet has affected the market for newspapers. [10] (b) Assess the relevance of price elasticity of demand, income elasticity of demand and cross elasticity of demand to a magazine publisher. [15]

Suggested Answers Part (a) Explain how the rise of the Internet has affected the market for newspapers.[10] Approach 1. Define key words o Rise of the Internet = “increasing availability of books, magazines, newspapers and other printed publications on the Internet” o Market involved = market for newspapers 2. Explain the economics concepts involved o Demand, supply, market equilibrium

1. Define key words 

Rise of the Internet = “increasing availability of books, magazines, newspapers and other printed publications on the Internet” o Consumers‟ perspective affects their demand for newspapers o Producers‟ perspective affects their supply of newspapers



Market involved = market for newspapers o Need to analyse the effect of the rise of the Internet on  Demand for newspapers  Supply of newspapers  Market equilibrium for newspapers

2. Explain the economics concepts involved (a) Demand for newspapers  Definition: Willingness and ability of consumers to purchase newspapers at a given price over a period of time

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 







Newspapers provide a daily source of current affairs, resulting in a naturally high demand for newspapers. Online news offer cheaper, faster and „live‟ access to current affairs, and even allow readers to provide feedback and comments, hence becoming a strong substitute for newspapers. There will be a higher demand for online news than for newspapers. Growing global affluence and the increasing Internet access to households (even in developing countries) encourage people to read online news, hence reducing the demand for newspapers. The increasing reliance on the computer and Internet for work-related and leisurerelated activities, and the availability of customised news feed, result in a higher demand for online news and a lower demand for newspapers. Evaluation point strictly for students’ knowledge: o However, people need a PC/laptop/PDA and Internet access to read online news. This makes it inconvenient for less wealthy people, IT-unsavvy people and people residing/working in countries with poor Internet infrastructure to read online news. Hence, the demand for newspapers may not fall as much.



Conclusion: The demand curve for newspapers will shift to the left.

(b) Supply of newspapers  Definition: Willingness and ability of producers to make a specific quantity of newspapers available to consumers at a given price over a period of time  In addition to readers, the rise of the Internet also gives newspaper companies cheaper, faster and „live‟ access to current affairs. They will have a wider selection of news from around the world to publish in their newspapers, without even having to send their journalists to the field. This represents cost-savings for the newspaper companies. Such technological improvements encourage newspaper companies to supply more newspapers at existing prices. The supply curve for newspapers may shift to the right.  In addition to retail and subscription sales, the newspaper companies earn a significant portion of revenue through advertising sales. A key determinant to attract advertisements is the daily average circulation rate of the newspapers. To maintain a high circulation rate, the newspaper companies must ensure that the supply of their newspapers remain high at any price. Some newspaper companies even resort to offering free copies of their newspapers to readers to ensure a high circulation rate (eg. TODAY newspaper). The supply curve for newspapers will remain constant (not shift left/right). 

Revision point for students: o According to the stem of the question, “Recently, many industry experts have been signalling the death of print media”. This does not mean that supply is falling. Rather, it means that the presence of the substitutes (ie. online news) causes demand for newspapers to fall, hence the quantity of newspapers supplied falls (ie. movement along the supply curve). If newspaper companies shut down due to low demand, this means that the demand curve for newspapers shift so much to the left that the quantity of

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newspapers supplied is close to zero, and not that the supply curve for newspapers has shifted left. 

For simplicity, we assume that the supply curve for newspapers remains constant.

(c) Market equilibrium  Position of balance where there is no surplus or shortage in the market  Determined by the interaction of demand and supply forces (ie. determined by free and competitive market)  Where actual price, actual quantity bought and sold are determined P

SS P0 P1

E1 E2 DD1

O     

Q

Q

1

0

D D Q of newspapers

Initial market equilibrium = E1 where DD=SS Creation of surplus following changes in market demand downward pressure in price New market equilibrium = E2 where DD1=SS Quantity of newspapers demanded and supplied falls (Q0 to Q1) Price of newspapers falls (P0 to P1)

Mark Scheme Level

Descriptors 

Able to provide a clear explanation and application of both demand and supply in context, with the correct use of a diagram.



Students claiming that supply remains constant must also explain this claim.



Able to provide an unbalanced explanation and/or application of both demand and supply in context.



Able to identify some effects of the rise of the Internet on the market for newspapers, without a diagram.

L3

L2 L1

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Part (b) Assess the relevance of price elasticity of demand, income elasticity of demand and cross elasticity of demand to a magazine publisher. [15] Approach 1. Explain the rationale for the firm to use elasticity concepts to manage his business o goals of a firm: maximize profits 2. Present arguments for the thesis o PED, YED and XED are relevant to a magazine publisher → how? 3. Present arguments for the antithesis o PED, YED and XED are not so relevant to a magazine publisher → why? o Other tools of analysis are also required → what? 4. Evaluate the extent of the relevance to a magazine publisher o Relevant – but sufficient? o Big picture – survival of the print media?

1. Explain the rationale for the firm to use elasticity concepts to manage his business 

Goals of a firm (No need for diagrams) o Profit-maximising: MR=MC o Maximum total revenue – minimum total cost o Elasticity is most relevant in achieving the revenue-maximising goal of a firm in order to maximize profits

2. Present arguments for the thesis Price elasticity of demand (PED) o

Definition: Degree of responsiveness of quantity demanded to a change in the price of the good itself

(a) PED allows the magazine publisher to know his pricing policy (ie. whether he should raise or reduce the price of his magazine to generate more sales revenue) 

When demand for the magazine is price elastic, reducing price from P1 to P2 causes a more than proportionate increase in quantity demanded from Q1 to Q2. The gain in total revenue (BCQ1Q2) is more than the loss in total revenue (P1ACP2). Hence, the magazine publisher will generate more sales revenue by increasing supply and hence reducing price.



When demand for the magazine is price inelastic, increasing price from P3 to P4 causes a less than proportionate decrease in quantity demanded from Q4 to Q3. The gain in total revenue (P4DFP3) is more than the loss in total revenue (FEQ3Q4). Hence, the magazine publisher will generate more sales revenue by reducing supply and hence raising price.

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P

P1 P2

P

SS1 SS2

A

Loss

B

C

DD

P4 P3

Gain

Q

Q2

Q of magazines

1

(b)

SS2 SS1

D

Gai

F

L o s s

E

Q4 Q3

DD

Q of magazine s



In order for the magazine publisher to identify the level of PED for the magazine, he needs to refer to the key determinant of PED and XED – the availability and closeness of substitutes (presence of competition).



If the magazine focuses on general interests and current events, then there is usually high competition due to high readership. Thus, such magazines have high PED and XED. The focus of such magazines includes Computers and Electronics, Entertainment and TV, Fashion and Style, Health and Fitness, Men‟s, Music, News and Politics, and Women‟s. Hence, the magazine publisher has to keep the price low (possibly lower than his competitors) to attract more readers to purchase the magazine. To generate more sales revenue, he should increase supply to reduce price.



If the magazine focuses on specific interests, then there is usually low competition due to an exclusive readership. Hence, such magazines have low PED and XED. The focus of such magazines includes Animals and Pets, Antiques and Collectibles, Art and Photography, Automobiles and Motorcycles, Business and Finance, Crafts, Hobbies, Home and Gardening, Lifestyle, Medical, and Science and Nature. Hence, the magazine publisher has to keep the price high to attract more readers to purchase the magazine. To generate more sales revenue, he should reduce supply to raise price.



Therefore, whether the magazine publisher should raise or reduce price (determine pricing strategy) depends on the nature of magazine

XED allows the magazine publisher to know the relationship of his magazine with other goods/services and the extent of how his sales revenue is affected by the demand for the related goods/services 

Cross elasticity of demand (XED) o Definition: Degree of responsiveness of quantity demanded to a change in the price of another good



In order for the magazine publisher to identify the level of XED for the magazine, he has needs to refer to the key determinant of XED – the presence of substitutes and complements.



We have already reviewed substitutes in the form of other magazines, and shall now look at substitutes in the form of online magazines. We have shown earlier that growing global affluence and the increasing Internet access to households 8

(even in developing countries) encourage people to read online news. Furthermore, online news offer cheaper, faster and „live‟ access to current affairs, hence becoming a strong substitute for newspapers. Similarly, with more online magazines becoming available and even being provided free, the presence of substitutes will reduce the demand and sales revenue for printed magazines. 

Therefore, the magazine publisher needs to craft non-price competition strategies to encourage loyalty of their readers so as to reduce the substitutability of print magazines against online magazines o Non-price competition to encourage loyalty of readers: Providing a discount price for annual subscriptions of the magazine, offering lucky draws and other special promotions for loyal readers, etc. o Diversification: Publishing magazines for different readership segments, so as not to “put all one‟s eggs in one basket” (eg. SPH Magazines publishes 37 different types of magazines).



To survive in this highly competitive market, the magazine publisher has to identify complementary goods/services that can help promote his magazine and hence generate more sales revenue. When the demand for the complementary goods/services rise, the demand for his magazine will rise too. Examples of complementary services include: o Cafés and wine bars: Their patrons are likely to include readers of magazines focused on hobbies and lifestyle. o Shops selling computer hardware, software and accessories: The customers are likely to include readers of magazines focused on computers and gaming. o Airport lounges: The patrons are likely to include readers of magazines focused on travel and lifestyle.

(c) YED allows the magazine publisher to know the extent of how his sales revenue is affected by his readers’ income level 

Income elasticity of demand (YED) o Definition: Degree of responsiveness of quantity demanded to a change in income



In order for the magazine publisher to identify the level of YED for the magazine, he has needs to refer to the key determinants of YED – the consumer‟s income level/standard of living, and their perception of the quality of the good (luxury good/inferior good/necessities).



If the magazine focuses on general interests and current events, then it caters to the mass market, and is typically low-priced. In general, magazines are normal goods, because the demand and sales revenue for magazines rises proportionally when income rises.



If the magazine focuses on specific interests, then it caters to a niche market, and is usually high-priced. In this instance, such magazines are regarded as luxury goods, because the demand and sales revenue for such magazines rises more than proportionally when income rises. Examples of such high society and luxury

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lifestyle magazines include „Singapore Tatler‟, „The Peak‟, „Prestige‟, „Harper's Bazaar‟, and „Icon‟. 

In a recession, the magazine publisher can expect the overall demand for his magazine to fall, particularly more so if his magazine focuses on specific interests. Readers are likely to be thriftier and would rather save then to spend during such periods when their incomes are reduced or their jobs are not secured. However, the recession is unlikely to have a significant impact on the wealth of high-income readers, hence their demand for magazines will remain constant.

3. Present arguments for the antithesis (a) PED, YED and XED are not so relevant to a magazine publisher 

If the magazine has high PED, pricing policy suggests that the magazine publisher reduces price to generate more sales revenue. However, if every publisher of such magazines adopts this price-reducing policy, then it will lead to price competition and a price war where only the readers stand to benefit from lower prices of magazines.



YED analysis suggests that demand and sales revenue for magazines rises proportionally when income rises. However, people usually limit their time for reading magazines (eg. during leisure time), so we may not necessary see an increase in demand for magazines when their income rises. Also, as people get richer, their tastes and preferences will change too. Hence, we can expect people to switch their choice of magazines from those focusing on general interests to those focusing specific interests, so the demand for the former may fall with rising economic growth.



XED analysis suggests that the magazine publisher should identify complementary goods/services that can help promote his magazine and hence generate more sales revenue. However, he needs to seek the partnership and approval of the suppliers of the complementary goods/service to allow his magazine to be sold at their premises.



To be able to accurately use these elasticity tools, the magazine publisher needs to collect and depend on empirical data and evidence, which may not necessary always coincide with reality across time.

(b) Other tools of analysis are also required 

The magazine publisher needs to consider ways to reduce/minimise costs in order to maximize profits. He will need to monitor the cost structure to ensure that his publishing firm is cost-effective. He can use cost-cutting measures like employing part-time and freelance writers, and allowing staff to work from home to minimise the size of his workplace. o Merger and acquisitions: Large publishing firms are able reap economies of scale, thus enjoying more cost-savings and larger profits, which creates more competitive pressure on smaller publishing firms. If the magazine publisher wants his magazine to „survive‟, he may have to merge or be acquired by another publisher (eg. „FiRST‟ movie magazine was acquired

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by SPH Magazines in 2005 and morphed into a special weekly pull-out section in The New Paper in 2009). 

In addition to retail and subscription sales, the magazine publisher earns a significant portion of revenue through advertising sales. Some key determinants to attract advertisements are: o The daily average circulation rate of the magazine: To maintain a high circulation rate, the magazine publisher must ensure that the supply of his magazine remains high at any price. Some magazine publisher even resorts to offering free copies of their magazine to readers to ensure a high circulation rate (eg. JUICE magazine). o The exclusive readership of the magazine: For example, „The Peak‟ is complimentarily distributed on a controlled circulation basis to individual readers and corporate companies who appreciate the finer things in life. Readers tend to be business leaders and leading professionals. 71% of the readership earns above $151,000 a year. Key advertisers include Air France, British Airways and other airlines.1

4. Evaluate the extent of the relevance to a magazine publisher 

PED, YED and XED are relevant to a magazine publisher in helping him to maximise sales revenue. However, this is insufficient for him to meet the eventual goal of profit-maximisation. Hence, it would be wiser for him to consider both ways to maximise revenue and ways to minimise costs as well.



According to the stem of the question, “Recently, many industry experts have been signalling the death of print media”. When readers eventually switch to online magazines, the low demand for magazines will cause magazine publishing firms to shut down. Hence, it is crucial for magazine firms to have a holistic review of their business strategy for survival which would include not just strategies to raise total revenue but also strategies to reduce total cost.

Mark Scheme Level

L3

L2 L1

1

Descriptors 

Able to discuss the effectiveness of PED, YED and XED as business strategies in context.



Able to suggest at least one other tool of analysis, eg. cost-effectiveness, advertising revenue model



Able to provide a sound but unbalanced discussion of the effectiveness of PED, YED and XED as business strategies in context.



Able to explain PED, YED and/or XED, not necessarily in context.



Unable to provide relevant examples of magazines to illustrate the degree of PED.

E2

Judgment based on analysis.

E1

Mainly unexplained judgment.

Sources:

http://www.sphmagazines.com.sg/news/2007/12/10/105 http://www.marketing-interactive.com/news/1291

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2a) Illustrating your answer with examples, explain why the government must intervene when positive externalities are present. [10] b) Assess the policies that the Singapore government adopts to achieve efficient allocation of resources where positive externalities are present. [15]

Suggested Answers Part (a) 

Explain what positive externalities are  give examples of positive externalities (external benefits) and explain how they are different from private benefits o Private benefit = benefit a consumer obtains from the consumption of certain goods o Positive externality = benefit enjoyed by a third party not directly involved in the transaction of the good o Since external benefit is not taken into account by consumers, social benefit is higher than private benefit. Social Benefit benefit enjoyed by the whole society i.e. MSB = MPB + external benefit.



Use a couple of examples in the context of Singapore to explain positive externalities o Example 1  what are the positive externalities of education to country’s overall productivity and national income? o Example 2  what are positive externalities of healthcare services such as immunization & vaccination? o Example 3  what are positive externalities of having Botanic Gardens, museums and preservation of historical buildings and sites?



Use diagram to explain why the government needs to intervene when positive externalities are present  choose an example to use, e.g. education, healthcare; and use it in explaining the diagram below MSC = MPC Cost/ Benefit

B C A MSB MPB Qp

Qs

Quantity

In the above diagram, society’s welfare will be maximised at social equilibrium (C) when output is at Qs. But market equilibrium level is where MPB =MPC (where firms and consumers pursue and maximise self-interests) and output is at Qp. o Social efficiency is not achieved as Qp < Qs, signifying an underproduction or underconsumption of the good by QsQp. Resources have been under-allocated in the production of this good. o Due to the underproduction and under-consumption of this good which generates positive externalities, the society suffers a welfare loss equivalent to the area ABC. o

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o

Example of what you may write if you are using healthcare example  there is not enough hospitals or medical resources (e.g. facilities, manpower, etc.) in many places in the world  under-allocation of resources to produce healthcare services which have positive externalities  allocative and social efficiency not achieved  the government needs to intervene to raise the production and consumption to the socially optimal level in order to improve society’s welfare.

Mark Scheme Level

Descriptors  Clear explanation of the MSB-MSC framework.

L3

 Clearly establish why the market failed, resulting in allocative inefficiency and DWL.  Good use of appropriate examples to explain the diagram.

L2

 Underdeveloped explanation (e.g. diagrams used without much depth in analysis or inaccurate diagrams) is likely to be observed.  Answers are largely theoretical with limited use of appropriate examples.  Answer has some basic facts but may contain inaccuracies or may lack elaboration.

L1

 The MPB-MPC and MSB-MSC framework is briefly mentioned.  Answer is mostly irrelevant with no evidence of understanding what market failure is.

Part (b) Answers should present measures pertaining to more than one example of positive externality. In choosing the measures, students should try to select measures from different ‘categories’ to give their answers more breadth and depth. (1) Subsidies Use diagram as illustration, explain how government uses subsidies to raise the level of production/consumption towards the socially-optimum output of Qs. Subsidy (equivalent to external benefits) to producers lowers cost of production while subsidy to consumers will raise their affordability (or reduce effective price, not market price). E.g., subsidised medical examinations received from polyclinics, HDB housing grants for first-time buyers, subsidised education received by Singaporeans and PRs at local education institutions. MPC, MSC

MSC = MPC B

P

MSCs = MPCs

B

c

Pm

O

MSC = MPC

P

c

Ps

MPC, MSC

MSB A

Qm

D

Qs

Pm MSB

A MPBs MPB Qty

Fig. A Subsidy given to consumers

Ps

D MPB

O

Qm

Qs

Qty

Fig. B Subsidy given to producers 13

Only one diagram is sufficient because it is basically explaining the same type of measure, i.e. subsidy. Evaluation: o Difficult to determine the exact value of external benefit to generate socially optimal level. Thus the amount of subsidy given may be too much or too little, leading to consumption beyond Qs or still below Qs. Undervaluation is still a lesser evil because it would still raise output from Qp towards Qs, even though it may not reach Qs. o Subsidies can lead to abuse of service and also poorer quality service (if medical staff are overworked and not motivated) o Subsidies are a strain on government budget. What are the opportunity costs? Can the government afford it? Will there be a need to raise taxes to fund the subsidies? What are the economic implications? o Who should the government subsidise? How different would the decision be across the different cases where positive externalities are present (e.g. education vs. healthcare)? (2) Compulsory consumption Explain how compulsory consumption helps to increase consumption to socially-optimum level and how such a policy can be implemented. Give appropriate examples of compulsory consumption in the case of education and healthcare in Singapore. Explain that while consumption of the good is made compulsory by law, the government need not be the one to produce the good. This can be contracted to the private sector. In the case of Singapore, how is this done? Evaluation: o Legislation is easy to understand and implement. But a good law does not necessarily bring about an effective law. There must be good enforcement. How difficult or costly is it to enforce the laws which Singapore has? What are some factors which are crucial to ensure effective enforcement of laws? o Measure allows even the lowest-income groups to consume the good. However, the government must ensure that the issue of affordability must be tackled, e.g. it is meaningless to compel everyone to have 6 years of primary school education if the family cannot afford to send their children to school. o Must the government the sole provider? When should it decide to provide and when should it let the private sector do so? (3) Joint Production Explain how such policy leads to greater social efficiency. One option is for the government to identify the shortfall in the output, i.e. allow the private sector to provide the good up to Qm and the government would step in to provide the shortfall of QmQs. Illustrate the examples of joint production in the area of education and healthcare in Singapore. Evaluation: o Joint production allows consumers to have more choices. There would also be healthy competition between the government and private sector providers, thus leading to efforts to improve quality of services.

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o

o

o

As government need not be the sole provider, it can focus its funds and efforts on areas that are more essential, e.g. primary school education and basic healthcare services (polyclinics, government general hospitals). This helps to raise the level of efficiency in government services and reduce wastage of resources. Difficult to obtain accurate information as to how much the government should provide and how much it should allow the private sector to provide. What factors would influence this decision of a government-private sector partnership? Must the government fully finance the portion of output it produces?

(4) Moral Suasion Explain how campaigns may help to promote consumption of certain services, e.g. promoting immunisation against easily transmitted diseases. Basically these programmes work towards correcting the information failure and raise consumers’ awareness of the positive externalities which exist. Evaluation: o This measure is relatively less costly than the others mentioned earlier and it also allows consumers the freedom to make their own decisions and choices. o However, the success rate of such measures is hard to predict. Time is also needed to change consumers’ mindset. It is hard to assess how consumers would react to the campaigns.

Mark Scheme Level L3

L2

Descriptors  Thorough application of facts and theory with an excellent ability to describe and explain this in a precise, logical and reasoned manner.  There is some evidence of a discussion on alternative solutions and an attempt to link them in context with the intention of the question  Answer shows explanation of any two policies to solve the problem of positive externalities. However, the analysis is underdeveloped.  Answer shows some knowledge about policies, but there are conceptual errors.

L1

 No reference made to examples.  Answer is mostly irrelevant with no evidence of understanding of relevant policies.

E2

Judgment based on analysis.

E1

Mainly unexplained judgment.

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