Promotional Exam Econs

Topics: Supply and demand, Externality, Cost Pages: 44 (10164 words) Published: November 21, 2011


JC1 Promotional Examinations
Revision Package 2011


Section A: Case Studies

1. 2007 TPJC Prelims H1 Paper CSQ1: China’s Water Woes

2. 2007 GCE A-Level Paper H1 CSQ1: International Tourism (covered in Lecture)

3. 2008 CJC Prelims H1 Paper CSQ1: The Illegal Drug Market

4. 2009 RVHS Year 5 End of Year Exams Paper CSQ1: Challenges of the Agricultural Sector

Section B: Essays

1. 2006 SAJC H1 Final Exams: Application of Demand and Supply – Price Control

2. 2008 SRJC H1 Prelims: Market Failure

3. 2008 A Levels H2 Essay: Elasticity of DD and SS

4. 2009 PJC H1 Prelims: Theory of DD and SS, Price Elasticity of DD and SS and Market Failure

5. 2009 HCI H1 Prelims: Market Failure

6. 2009 YJC H1 Prelims: How the Macroeconomy Works – Key Economic Indicators and National Income Accounting

Section A: Case Studies

Answers to the Case Studies

Case Study 1:

Answers to 2007 TPJC Prelims H1 Paper CSQ1

(a)(i) Compare the percentage of the coverage of urban water supply with that of rural water supply in China from 1990 to 2015. [2]

• Coverage of urban water supply is expected to fall slightly from 100% in 1990 to the projected 98% in 2015 [1] while coverage of rural water supply is expected to rise steeply from 59% in 1990 to 85% in 2015. [1]

(a)(ii) Is water a public good? Justify. [2]

Excludability [1]
• For a resource such as water from river, stream or underground water, it is non-excludable. It is too costly and almost impossible to restrict the benefits to those who pay for them (this is only in the case of water which runs across areas like the Mekong River - which cuts across countries/Yangtze River – cuts across different states). It is available, free of charge to anyone who wants to use them. OR

• However, water in cities, provided by the state municipality, is excludable. Households or plants can be prevented from using this water by cutting supply.

Rivalry [1]

• Water is rivalrous. The consumption of water decreases the amount available for the next person e.g. wells dry up if too many households dig wells and draw down the amount of underground water available. Rivers dry up if too many farmers divert water for irrigation. OR

• Clean drinking water that has been properly treated and purified is finite. One person’s use of the water diminishes other people’s use of it.

Hence, water is not a public good.

(b)(i) With the aid of a diagram, explain why “prices of water in China remained only about a third of the world average”. (Extract 2, paragraph 2) [2]

Low prices as a sign of price ceiling
• “Prices of water in China remained only about a third of the world average” – concept of price ceiling. Price ceiling is the maximum price set by the government. With reference to Fig. 1, the world average market price is Pw where the demand curve intersects with the supply curve. China sets its price below the world average market price at Pc. [1]

• Diagram [1]


Figure 1: Price ceiling (Pc) set by China Government to cap Price of Water

Alternative answer
1. Subsidies
← a simple case of subsidies affecting COP, hence shifting the supply curve

(b)(ii) Who gains and loses as a result of such a policy mentioned in (b)(i)? [4]


(b)(iii) With the aid of a diagram, explain and illustrate how water pollution in China results in market failure. [6]

• Students should draw the diagram for negative externality (water pollution) and explain how the water pollution causes the market to fail.


Figure 2: Water pollution as a negative externality

• Water pollution is a form of negative externalities. Externalities are defined as spillover effects to the third party arising from...
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