(2014) 8823 H1 Econs Paper CSQ 1 Suggested Answers by Mr Eugene Toh (A Level Economics Tutor)
(2014) A Level H1 Econs Paper 1 CSQ Q1
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a. The first reason why there has been high demand for private car use in South-East
Asian cities would be likely due to the high economic growth, attributing to rise in incomes of consumers in South-East Asian cities. This will result in an increase in demand for private car use, contributing to the high demand.
The second reason why there has been high demand for private car use in South-East Asian cities would be likely due to the tastes and preferences of consumers for private car use given their convenience and its role as a status symbol. This will also result in high demand for private car use.
bi. The use of buses decreased between 1952 to 2010 while the use of rail and cars both
increased between 1952 to 2010.
The extent of the increase in car usage was far greater than the increase in rail usage
between 1952 to 2010.
bii. Between 2007 to 2010, the prices of bus fares, rail fares and prices of items needed in
running a car all saw an increase.
The prices of items needed to run a car increased by a greater extent compared to bus fares and rail fares.
Bus and rail are substitutes for cars. Given the relative increase in cost of running a car to be greater than the increase in bus fares and rail fares, we would expect the demand for cars to decrease. As demand for car usage decreases, we would expect the billions of kilometres travelled by car to decrease.
This was reflected in the billions of kilometres travelled by car to fall from 2007-2008, and also from 2009-2010.
However, from 2008-2009, we can see that bus fares and rail fares increased by a greater extent than increase in cost of running a car. We should thus have expected that demand for car usage should decrease as consumers should switch from driving cars to using bus and rail. Yet, from 2008-2009 we see the billions of kilometres travelled by passengers on a car increasing marginally from 678 to 680, which runs contrary to our theory.
Thus, we can conclude that there are other factors also influencing changes in passenger transport usage in the UK, other than the changes in relative prices.
ci. Price elasticity of demand measures the degree of responsiveness of quantity
demanded of a good, given a change in the price of the same good, ceteris paribus.
If price elasticity of demand for bus travel may be as low as (-)0.4, this will mean that a
decrease in prices by 1% may potentially only result in an increase in quantity demanded by 0.4%.
cii. If demand is price inelastic relative to supply, a state subsidy is unlikely to be passed on
to the passenger in terms of lower fares.
Given that demand is price inelastic, this means that even if prices are successfully
lowered, this will result in a less than proportionate increase in the quantity demanded. Subsidising public transport may not be an extremely effective way to encourage the use of public transport.
d. A negative externality is an external cost imposed on a third party who is not involved in
the production or consumption of the good.
When individuals opt to use motor vehicles, they consider only their own private costs
which can include the cost of the vehicle, cost of running the vehicle e.g. fuel or maintenance of the car.
They ignore the costs to third parties, which according to Extract 1, congestion causes delays which reduces the leisure and work time of individuals who are stuck in traffic, increased pollution which can cause worsen city air quality, affecting the health of residents in the city.
These costs are not included in the computation of the individuals’ private costs.
Since social costs include both private costs and external costs, the presence of external costs will result in the divergence of private costs and social costs.
e. How imposing taxes and other charges help address problem of negative externality
Imposing taxes and other charges on motorists serve to increase the marginal private
costs associated with the use of cars.
This will shift MPC to the left from MPC0 to MPC1 (where MPC1 = MPC0 + tax). The
ideal outcome should be to impose a tax exactly equivalent to the marginal external cost (MEC) so that the gap between MPC and MSC will be entirely closed off, reducing the quantity of roads consumed from Qm to Qs.
This will force motorists to internalise the external costs associated with usage of congested roads.
Limitations and evaluation
Firstly, it is not easy to determine the exact value of MEC to implement an exact tax. Lost productivity and increased carbon emissions arising from traffic congestion are not easily estimated. There are also intangible costs, such as lost leisure time, that can also be difficult to quantify.
Secondly, taxes and other charges tend to also be inelegant solutions that may not necessarily always address the negative externalities discussed above. For instance, implementing fuel taxes serves to reduce road usage, but the key issue discussed was specific to the use of congested roads, which tend to usually be specific roads during peak hours, and not the use of all roads across all hours of the day. Implementing fuel taxes does not, therefore directly address the congestion problem.
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