(2019) A Level H2 Econs Paper 1 CSQ Q1

a.         Fracking has resulted in cheaper gas being produced —> coal and gas are alternative energy sources —> fall in price of substitutes à fall in demand for coal

b.         Cross elasticity of demand measures the degree of responsiveness of a change in demand of good A to a change in price of good B.

            The cross elasticity of demand between coal and renewable energy is positive.

            Given a fall in prices of renewable energy as stated in Extract 1, demand for coal has clearly declined given a fall in consumption. This is a positive relationship which indicates the XED value is positive.

c.         The UK government already had a minimum price in place for coal in 2015. An effective minimum price is set a Pmin1, above Pe. This would cause quantity demanded to fall from Qe to Qd as less consumers of coal are willing to buy coal at a higher price, while quantity supplied will increase from Qe to Qs as more producers of coal are willing to sell coal at a higher price. This generates a deadweight loss stated by area ABC and a surplus of QdQs

            In 2016, as the UK government further increases the minimum price from Pmin1 to Pmin2, the quantity demanded for coal will fall further from Qd to Qd2 while quantity supplied will increase from Qs to Qs2. The surplus further increases to Qd2Qs2 and deadweight loss is now area ADE

d.         The burning of coal generates negative externalities due to the carbon emissions generated in the burning of coal. Increased carbon emissions causes both health issues related to the respiratory system as well as causing global warming, causing an estimated “4300” premature deaths. Due to the presence of such external costs, there is a divergence between MSC & MPC in the market for coal.

            Production of coal is at Qm where MPC = MPB but the socially optimal level of production should be at Qs where MSC = MSB. Deadweight loss in this case is the shaded area ABC.

            An increase in demand for coal shifts demand from DD0 to DD1 as stated in the diagram below. This changes the deadweight loss from ABC to DEF.

The impact on deadweight loss is not quantitatively certain (whether or not there is an increase) but an increase seems likely.

e.

f.          Define economic efficiencies as allocative efficiency, productive efficiency & dynamic efficiency

How removing state monopolies and creating more competitive markets will improve economic efficiencies

1.     State monopolies have no profit motive – no incentive to cut costs

2.     They are unlikely to be productively efficient

3.     State monopolies have no profit motive + lack competition – no incentive to keep costs low to increase profitability OR/AND no incentive to improve on products to compete due to complacency

4.     They are unlikely to be dynamic efficient

5.     Therefore, removing state monopolies and creating more competitive markets will likely increase productive & dynamic efficiency since firms will try to keep costs low to compete and increase profitability

How removing state monopolies and creating more competitive markets will not improve economic efficiencies

1.     State monopolies can choose to maximise societal welfare by setting prices = marginal costs to achieve allocative efficiency OR to produce at an output level that is socially optimal

2.     State monopolies can therefore be allocatively efficient

3.     State monopolies (as opposed to a more fragmented, competitive private market with multiple firms) are able to produce at a higher output level —> deriving economies of scale à cost savings can be passed on to consumers in terms of lower prices

4.     State monopolies can also be productively efficient with the higher level output

Contextualised to Vietnamese government

1.     If the information given about productivity being 1/10 of Singapore, productive efficiency is not likely being achieved at the current state

2.     The opinion of a Vietnam expert that EVN is dependent on old methods and fond of yesterday’s technology suggests that there is no dynamic efficiency as well

3.     We don’t have information to determine whether allocative efficiency is present at the moment

4.     Given the above information – it is likely the case that economic efficiencies can be improved via removing state monopolies and creating more competitive markets

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