(2020) A Level H1 Econs Paper 1 CSQ Q1

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2020 A Level Economics 8823 CSQ1 Suggested Answers Outline

a.         With the exception of Sweden & France, UK’s government spending as a % of GDP is higher than many other countries.

            UK’s spending as a % of GDP was decreasing over the years as compared to Singapore (which stayed largely constant). The exception was that in 2009 & 2010, UK’s spending as a % of GDP increased. 

b.         Income

1.     Increase in incomes (except for years where there was a downturn)  increase purchasing power  increase in demand for passenger transport

            Population size

1.     Increase in population size  increase in size of market  increase in demand for passenger transport

            Price of alternative transport

1.     While prices of trains and buses were going up, there were tax freezes on fuel on motorist, this made motor vehicles becoming cheaper in relative terms (this means motor vehicles are logically still going to be more expensive, but relatively less so)  which might make passenger transport a less attractive alternative  fall in demand for passenger transport 

c.         How should the usual market adjustment process work

1.     An increase in demand for housing (for whatever reasons)  increase in price for housing

2.     The increase in price for housing should over time, encourage sellers to enter the market / suppliers to supply more as they have more incentive to do so given the higher prices.

3.     The subsequent increase in supply in later periods should then dampen the price increases to some extent.

Why it simply does not work in the UK housing market

Supply for housing is very price inelastic

1.     Supply for housing is very price inelastic. This is because of government regulation causing planning restrictions which means even if suppliers (developers) wanted to respond to the increase in prices by increasing supply, it’s hard

2.     Thus, any demand increases will lead to very sharp increase in prices 

Expectations of increase in prices

1.     The expectations of an increase in prices is fueling an increase in demand in addition to all the other factors mentioned

2.     This causes demand to increase even more

d.         What the data suggests about the relationship between PED & total revenue

1.     There are 2 data points we can examine

2.     When government increased taxes by 3.9%, government tax revenues fell by 7% which suggests that the impact on quantity demanded was more than proportionate – given that government tax revenues would be a total % of sales revenue.

3.     When government decreased taxes by 2%, government tax revenues increased by 4%, again suggesting the impact on quantity demanded was more than proportionate

4.     This suggests that demand for Scotch Whisky is price elastic

The rate of indirect tax on scotch whisky be cut

1.     Scotch Whisky is an important export industry, and higher taxes could hurt exports and therefore trade balance, and can also affect economic growth via a fall in (X-M)

2.     It could also cause an increase in cyclical unemployment (elaborate)

3.     Fall in government tax revenues hurts government fiscal position

The rate of indirect tax on Scotch Whisky should not be cut

1.     A primary case of implementing an indirect tax should be to address negative externalities from alcohol consumption

2.     Cutting alcohol taxes could make Scotch Whisky cheaper and encourage greater alcohol consumption which is at odds with the government’s objective in ensuring a more efficient allocation of resources

ei.        A positive externality is a benefit received by a third party who is not directly involved in the production or consumption of the good.

            When people increasingly switch to using bus or rail travel, there will be reduced congestion. Such reduced congestion benefits third parties for example companies who may see increased availability of time from employees as they spend less time traveling. (other reasonable explanations acceptable)

eii.       How subsidizing bus travel and rail travel could be the best policy

1.     Subsidising bus travel and rail travel will reduce COP for firms  shifting supply to the right  output increases to a more socially optimal level  reduce market failure (show this on a diagram)

2.     Individuals may switch from private transport to taking bus & train, reducing congestion

            Why it is not the best policy

1.     Subsidising rail & bus travel is costly and may not be a sustainable policy

2.     Price is not the only factor why consumers may choose private transport over public transport (other issues like comfort, convenience, prestige which may be important to some as well) – effectiveness is thus an issue

            Suggest alternative policies + evaluate

1.     Taxes for road usage for private transport

2.     Legislation e.g. (bus lanes in Singapore)

            

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