promos book 3

Question 1

Reasons for govt intervention (2)

Answer 1

1. Inefficiency in resource allocation
   - allocative and productive
   - market failure
2. Inequitable distribution of income
   - to create a more inclusive society

Question 2

Market failure definition

Answer 2

Failure of the free market to achieve an efficient allocatin of resources that maximises the society’s welfare

Question 3

Allocative efficiency

Answer 3

• sum of consumer surplus and producer surplus is maximised
• P = MC
• MSB = MSC

Question 4

Productive efficiency

Answer 4

• firms produce on LRAC
• society produces on PPC

Question 5

Dynamic efficiency

Answer 5

• results fromp improvements in technology that occur over time

Question 6

How free market leads to productive efficiency

Answer 6

• pursuit of self interests
• firms aim to maximise profits
• profit motive incentivises firms to be productively efficiency and keep unit costs as low as possible

Question 7

How free market leads to allocative efficiency

Answer 7

• allocates resources according to the market demand and supply
• consumers will only consider their own MPB of consuming a good and the price of the good (will consume an additional unit of the good as long as the MPB from the consumption exceeds the price they have to pay for it)
• consumers will consume till MPB = P
• firms will only consider the MPC of production and price they will receive for the good
• producers will produce to the point where MPC = P
• consumer and producer surplus is maximised
• achieved when the value society places on the last unit of the good (P) is equal to the opportunity cost in terms of resources used in producing that last unit (MC)

Question 8

Reasons for market failure (3)

Answer 8

1. externalities
2. info failure
3. zero provision of public goods
4. market dominance
5. immobility of fops

Question 9

Externality

Answer 9

• when some of the costs or benefits associated with the production/consumption of the good spills over onto third parties
• creates a divergence between private and social costs or benefits

Question 10

Marginal external cost definition

Answer 10

costs that are imposed on third parties who are not directly involved in the production or consumption of a good or service

Question 11

what adds up to marginal social cost

Answer 11

marginal private cost + marginal external cost

Question 12

what adds up to marginal social benefit

Answer 12

marginal private benefit + marginal external benefit

Question 13

negative externalities from production + answering format + graph

SIECOOPDOG

Answer 13

when external costs are imposed on third parties from the production of a good/service by firms (eg. petrochemicals that pollute the earth)

1. in the pursuit of self interests, ______ would only consider their own private costs of production (eg. _____) and private benefits such as the price they receive for the sale of ______.
2. they will ignore the external costs imposed on ______
3. these external costs create a divergence between the MPC and MSC of producing _____
4. the demand curve for _____ is represented by the MPB of _____ to consumers and is assumed to also be the MSB for society
5. the free market equilibrium output of the industry is Qe units where MPC = MPB
6. however, at Qe, the MSC for producing the _____ exceeds MSB for consuming them, meaning that the opportunity costs to society of producing the Qeth unit is higher than the benefits society gains from consuming that unit
7. output is allocatively inefficient, resulting in an overproduction of ______
8. The DWL is represented by area _____
9. Society will be better off if it reduces the output of ______ to Qs
10. Hence there is a need for the government to intervene

graph 1

Question 14

Govt policies for negative externalities of production and consumption

Answer 14

using policies like indirect taxes/legislation/regulation

Question 15

negative externalities from consumption + answering format + graph

Answer 15

when external costs are imposed on third parties from the consumption of a good or service by private individuals (eg. smoking)

1. in the pursuit of self interests, ______ would only consider their own private benefits such as the satisfaction they gain from consuming ______.
2. they will ignore external costs imposed on third parties, however, __(third parties)__ _________, thus causing external costs where MEB < 0
3. the negative externalities arising from consuming _____ creates a divergence between MPB and MSB where MPB enjoyed by the private consumers is higher than the MSB to society
4. the supply curve for _____ is represented by the MPC of ______ to producers and is assumed to also be the MSC for society
5. the free market equilibrium output of the industry is Qe units where MPC = MPB
6. however, at Qe, the MSC for production _____ exceeds MSB for consuming them, meaning that the opportunity cost to society of producing the Qeth unit is higher than the benefits society gains from consuming that unit
7. output is allocatively inefficient, resulting in an overproduction of ______
8. The DWL is represented by area _____
9. Society will be better off if it reduces the output of ______ to Qs
10. Hence there is a need for the government to intervene

graph 2

Question 16

positive externality from consumption + answering format + graph

Answer 16

when external benefits are enjoyed by third parties from the consumption of a good or service by private individuals (eg. education)

1. in the pursuit of self interest, utility maximising consumers only consider their own private benefit (eg. better career prospects) and private costs
2. they will ignore the external benefits or positive externalities generated for the rest of society such as _______, thus causing MEB > 0
3. the positive externalities arising from the consumption of education leads to a divergence between MSB and MPB where the MSB enjoyed by society is higher than the MPB enjoyed by consumers
4. the supply curve for _____ is represented by the MPC of ______ to producers and is assumed to also be the MSC for society
5. the free market equilibrium output of the industry is Qe units where MPC = MPB
6. however, at Qe, the MSB for consuming _____ exceeds MSC for producing them, meaning that the opportunity cost to society of producing the Qeth unit is lower than the benefits society gains from consuming that unit
7. output is allocatively inefficient, resulting in an underproduction of ______
8. The DWL is represented by area _____
9. Society will be better off if it increases the output of ______ to Qs
10. Hence there is a need for the government to intervene

graph 4

Question 17

positive externality from production + answering format + graph

Answer 17

when external benefits are enjoyed by third parties fromt he production of a good or service by private firms (eg. R&D)

1. in the pursuit of self interest, utility maximising producers only consider their own private benefit (eg. more cost efficient production processes) and private costs
2. they will ignore the external benefits or positive externalities generated for the rest of society such as _______ (eg. other companies benefiting from widespread adoption of the new tech), thus causing MEC < 0
3. the positive externalities arising from the production of R&D leads to a divergence between MPC and MSC where the MPC incurred by the firm is higher than the MSC to society as firms engaging in R&D are not compensated for financing these projects and generating these external benefits
4. the demand curve for _____ is represented by the MPB of ______ to consumers and is assumed to also be the MSB for society
5. the free market equilibrium output of the industry is Qe units where MPC = MPB
6. however, at Qe, the MSB for consuming _____ exceeds MSC for producing them, meaning that the opportunity cost to society of producing the Qeth unit is lower than the benefits society gains from consuming that unit
7. output is allocatively inefficient, resulting in an underproduction of ______
8. The DWL is represented by area _____
9. Society will be better off if it increases the output of ______ to Qs
10. Hence there is a need for the government to intervene

graph 3

Question 18

Info failure + types

Answer 18

occurs when ppl have inaccurate, incomplete, uncertain or misunderstood data and hence make potentially wrong or suboptimal choices about their behaviour resulting in an over or underconsumption of a good or service

1. imperfect info
2. asymmetric info

Question 19

Overallocation of resources due to imperfect info + answering format + graph

Answer 19

1. unaware of the true private cost arising from consuming such goods because they have incorrect or incomplete info
2. for example, ____ (eg. consumers may not be fully aware of all the ill effects of regular consumption of high sugar drinks such as obesity)
3. consumers overestimate their own private benefit and over value the good
4. causes the demand under imperfect info to be higher than the demand with perfect info
5. free market equilibrium where DD 0 = SS occurs at output Qe while socially optimal level is at output Qs
6. hence there is overconsumption of ___ and too many scarce resources are allocated to the production and consumption of _____
7. this results in a welfare loss of area ___ and the social benefits gained from consuming QsQe is less the cost of the resources used to produce them
8. need govt intervention

• can be influenced by advertisements and be influenced by how the good is portrayed by the suppliers

graph 5

Question 20

Underallocation of resources due to imperfect info + answering format + graph

Answer 20

1. unaware of the true private benefit arising from consuming such goods because they have incorrect or incomplete info
2. for example, ____ (eg. consumers may not be fully aware of all the benefits of health screenings to detect underlying illnesses)
3. consumers underestimate their own private benefit and under value the good
4. causes the demand under imperfect info to be lower than the demand with perfect info
5. free market equilibrium where DD 0 = SS occurs at output Qe while socially optimal level is at output Qs
6. hence there is underconsumption of ___ and too little resources are allocated to the production and consumption of _____
7. this results in a welfare loss of area ___ and the social benefits gained from consuming QsQe is more the cost of the resources used to produce them
8. need govt intervention

graph 6

Question 21

Asymmetric info + types

Answer 21

more well informed party utilises their superior info to benefit themselves at the expense of others

1. adverse selection
2. moral hazard

Question 22

Adverse selection

Answer 22

• profit seeking seller knows more about the attributes of the good sold than the buyer
• buyer runs risk of being sold a low quality good

eg. car dealer
- buyers offer low price for all the vehicles in the market because they cannot tell good quality cars from bad ones

• low price discourages sellers of higher quality goods and drop out of the market
• market only has low quality products
• market adversely selects against the higher quality goods in favour of bad ones

eg. similar for health insurance

• utility max insurance buyers will not divulge their health conditions
• insurance companies then charge a higher price since they dont know if u are alr sick
• healthy indivs will be deterred from paying the higher price
• cause them to leave the market and the insurance buyers will be left with ppl who are more sick because only they find insurance worth paying for
• result in good products and consumers being under represented
• lead to a missing market where parties cannot buy or sell a good even though it may be beneficial for them to do so

Question 23

moral hazard

Answer 23

economic agents take greater risk than they normally would

• arise when the party with more superior information in a transaction has both the incentive and ability to shift costs onto another party

eg. insurance
- ppl engage in riskier behaviour knowing that insurance will cover them if they get hurt
- increases aggregate risk and increases social cost

Question 24

govt intervention for info failure

Answer 24

education and campaigns
legislation and regulation
tax/subsidies

Question 25

zero provision of public good (no need)

Answer 25

impossible or extremely costly to exclude non paying consumers from enjoying the good once produced

Question 26

2 features of public goods + explanation + 1 minor one (no need)

Answer 26

1. non rivalry
   - consumption of the good by one person does not reduce the amount or benefits available to others
   - MC of providing for and allowing an additional user to share the usage of the good is 0
   - for allocative efficiency, P = MC and since MC = 0, P = 0
   - any profit driven firm will not provide free goods
2. non excludability
   - very costly to exclude non payers from consuming and benefitting from the good
   - hence no producers will want to provide such goods as there is a free rider problem
   - hard for firms to collect revenue for the goods they provide
3. non rejectability
   - inability of consumers to refuse the consumption of a good once it has been producers
   - consumers have to bear the cost of the good even if they personally do not derive utility from it

Question 27

govt intervention for public good (no need)

Answer 27

directly provide them as the public good will not be provided through the free market

Question 28

how does market dominance result in market failure

Answer 28

1. allocative inefficiency
   - set price at profit max price instead of where P=MC
   - benefit gained from consuming the las tunit of the output is higher than the cost of using society’s resources to produce that unit
   - underproduction and should produce more
   - every additional unit consumed will yield a net social benefit
   - DWL formed
2. productive inefficiency
   - with the ability to make supernormal profits in the LR, firms can become complacent and be X inefficient and operate above the LRAC
3. dynamic inefficiency
   - monop and oligop (collusive) have high BTE and no incentive to engage in R&D
   - product quality falls over time

Question 29

immobility of FOP (no need)

Answer 29

• factor inputs may be very slow to respond in their respective resource markets
• supply and demand imbalances occur and suboptimal production levels could result in market failure
• producers may also make production decisions that do not lead to the most efficient outcomes

Occupational
- occupation specific skills might not be transferable to other jobs
- difficult to gain re employment due to mismatch of skills
- waste of resources and hence market failure
- some capital inputs are specific to the industry and will be left un utilised
- productive inefficiency

Geographical
- barriers for labour moving from one area to another to find work
- discourages labour from moving into areas where there are shortage of labour causing high unemployment rates in another area
- this represents a loss in output as actual output is below potential output

Question 30

Inequity
2 main causes (no need)

Answer 30

equity when there is fairness in the distribution of essential goods and services that are necessary for survival

1. excessive income inequality
   - unequal distribution of income that is not considered to be fair and just
   - cause market to channel more scarce resources to providing normal and luxurious goods due to the rich’s higher ability to pay
   - lack of effective demand leads to less quantities of essential goods
2. high prices of essential goods and services
   - reduce affordability
   - rise in price due to different reasons (eg. covid)

Question 31

income inequality (no need)

Answer 31

examined by looking at wealth –> accumulated value of both physical and financial assets of an indiv

Question 32

representations of income inequality + graph (no need)

Answer 32

1. Lorenz curve
   - shows degree of inequality that exists in the country
2. Gini coefficient
   - ratio from lorenz curve
   - ranges from 0 to 1
   - as gini coefficient increases, income inequality increases

graph 7

Question 33

causes of wage and income inequality (no need)

Answer 33

1. wage inequality
   - those who receive higher wages then to be those whose services are high in demand relative to supply
   - healthy degree of wage inequality can be equitable as it fairly compensates and rewards the more educated and productive/skillful
2. income inequality
   - ppl with other assets can have very large non wage incomes (eg. rent)
   - high wage inequality aggravates income inequality because their large savings makes it possible for them to accumulate physical assets etc.

Question 34

effects of excessive income inequality and inequity (3) (no need)

Answer 34

1. inequitable distribution of resources
   - poor cannot afford essential goods and services
2. unequal access to opportunities
   - without govt intervention, rich can afford higher quality education, living environments etc.
   - leads to social immobility
   - income gap will keep rising
3. others
   - social and political instability
   - affect social cohesion and prosperity of a country

Question 35

benefits of income inequality (no need)

Answer 35

1. provides incentive to work hard
   - boost economic growth of country
2. improve resource allocation
   - channel workers and resources away from contracting industries and divert them towards upcoming industries

Question 36

govt failure

Answer 36

situation where govt intervention in the market leads to a worse outcome in terms of greater inefficiency and greater misallocation of resources

Question 37

How to solve externalities (negative and positive)

Answer 37

negative
- taxes
- legislation/laws
- production quota
- tradeable permits system/cap and trade

positive
- subsidies
- legislation/laws

Question 38

taxes on goods with negative production externalities + answering format + graph

6

Answer 38

1. government can levy a per unit production tax equivalent to the monetary value of the marginal external cost at the socially optimal output level
2. shifting the supply curve upwards from MPC to MSC = MPC + indirect tax
3. cause a rise in the market price of the good, causing consumers to reduce quantity demanded from Qe to Qs
4. causes the net price for producers to fall from P0 to P2, causing producers to reduce quantity supplied from Qe to Qs
5. results in a reduction in quantity from the free market output level to the socially optimal level where MSB = MSC
6. DWL from overconsumption of good prior to the tax is eliminated

graph 8

Question 39

tax on pollutants

Answer 39

• creates incentives for firms to pollute less by imposing a carbon tax
• in order to pay less tax, firms will switch to greener tech to pollute less
• when pollution falls, the MEC of producing each additional unit of output falls, decreasing the divergence between the MSC and MPC
• socially optimal output will increase and extent of market failure decreases
• normal tax will only decrease output but not encourage producers to adopt new tech to solve the problem

graph 9

Question 40

taxes on goods with negative consumption externalities + answering format + graph

6

Answer 40

1. government can levy a per unit production tax equivalent to the monetary value of the marginal external cost at the socially optimal output level
2. shifting the supply curve upwards from MPC to MSC = MPC + indirect tax
3. cause a rise in the market price of the good, causing consumers to reduce quantity demanded from Qe to Qs
4. causes the net price for producers to fall from P0 to P2, causing producers to reduce quantity supplied from Qe to Qs
5. results in a reduction in quantity from the free market output level to the socially optimal level where MSB = MSC
6. DWL from overconsumption of good prior to the tax is eliminated

graph 10

Question 41

advantages and limitations of taxation for negative externalities (3 each)

Answer 41

1. provides revenue which can be used for redistribution purposes (eg. smoking tax spent on educational campaigns)
2. provide financial incentives for behavioural changes (can still operate according to market forces)
3. tax levels can be continually refined to achieve desired outcome
4. hard to measure and place monetary value on the externalities
5. regressive and inequitable (tax takes a proportionally greater amount from those with lower incomes)
6. unintended consequences (eg. fuel tax increased price of heating homes so ppl choose wood instead which generates more pollution/ppl travelling to buy food from places without tax)

Question 42

indirect subsidies on positive production externality + answering format + graph

5

Answer 42

1. govt provide a subsidy of an amount equal to the MEB
2. lower cost of production, causing downward shift of SS curve from MPC to MSC = MPC - subsidy
3. profit max producers are incentivised to increase quantity supplied to Qs as they are more profitable
4. output increases to the socially optimum level where MSC = MSB
5. DWL is eliminated

graph 11

Question 43

indirect subsidies on positive consumption externality + answering format + graph

6

Answer 43

1. govt provide a subsidy of an amount equal to the MEB
2. lower cost of production, causing downward shift of SS curve from MPC to MSC = MPC - subsidy
3. causes price that consumers pay to fall from P0 to P1 and post subsidy price received by profit max producers increase from P0 to P2
4. profit max producers are incentivised to increase quantity supplied to Qs as they are more profitable and consumers increase quantity consumed to Qs as it is more affordable
5. output increases to the socially optimum level where MSC = MSB
6. DWL is eliminated

graph 12

Question 44

direct subsidy on positive consumption externality + answer format + graph

6

Answer 44

1. direct subsidy to consumers equal to the MEB
2. cause shift of DD curve from MPB to MSB = MPB + direct subsidy
3. price of good falls and is more affordable so quantity demanded increases to Qs
4. post subsidy price received by profit max producers increase to P2 and they will produce more as it is more profitable and quantity supplied increases to Qs
5. output increases to socially optimum level where MSC = MSB
6. DWL is eliminated

graph 13

Question 45

benefits + limitations of subsidies (4,3)

Answer 45

advantages
1. subsidy is popular and easily implemented and can be adjusted according to magnitude of problem
2. can operate according to market forces
3. financial incentives internalise the positive externalities resulting in a change in behaviour
4. win votes for government

cons
1. valuation of MEB is had to quantify
2. subsidies can impose huge burden on govt and tax payers (increasing taxes is politically unpopular and will affect votes for govt)
3. large opp cost as money cannot be invested into other sectors

Question 46

legislation/law for negative consumption externality + answering + graph

4

Answer 46

eg. age requirement for smoking

1. limits/prevents consumer activities that impose costs on third parties
2. causes a shift in demand curve from DD = MPB towards DD = MSB
3. eliminate the externality with consumption and shift output to socially optimal Qs
4. removing deadweight loss of ABC

graph 14

Question 47

legislation/law for positive consumption externality + answering + graph

4

Answer 47

eg. primary education is compulsory

1. increases consumer activities that bring benefits for third parties
2. causes a shift in demand curve from DD = MPB towards DD = MSB
3. eliminate the externality with consumption and shift output to socially optimal Qs
4. removing deadweight loss of ABC

graph 15

Question 48

legislation/law (quota)for negative production externality + answering + graph

3

Answer 48

eg. production quota

1. places a limit on the quantity of a good produced at Qs
2. eliminate the externality with consumption and shift output to socially optimal Qs
3. removing deadweight loss of ABC

graph 16

Question 49

Advantages and limitations of legislations/laws (2,2)

Answer 49

1. simpler to implement compared to market based measures as there is less technical difficulties
2. greater certainty in achieving the target output compared to taxes (not reliant on price mechanism)
3. displaces the price mechanism and output is no longer responsive to a change in its price –> onus lies on the govt to predict as best as it can the socially desired level of output (but they suffer from imperfect info and might not be able to do so accurately)

eg. when limiting pollution, govt must know about alternative tech the companies can adopt, industry specific practices and they respective emissions but these are hard to assess

2. enforcement of such laws may be difficult/expensive

Question 50

Tradeable permits system/cap and trade + which externality? + answering format + graph

7

Answer 50

negative production externality

1. tradeable permits are permits to pollute that are issued to firms by a government/international body that can be traded in a market (perfectly price inelastic)
2. each firm is granted a certain number of permits to discharge a certain quantity of greenhouse gases over a period of time
3. these permits can be bought and sold amongst interested firms, with the price being determined by the market demand and supply
4. if a firm emits a lower level of pollutants than the permits allow for, they can sell the unused permits in the market
5. if a firm produces more than the permits allow for, there will be heavy penalties
6. as the economy grows and firms increase their production of goods, demand for the permits will increase from D1 to D2, causing price to rise
7. in the event that optimal level of pollution falls, the government can reduce the number of tradeable permits causing a shift in supply from S1 to S2, causing price to rise

graph 17

Question 51

Advantages and limitations of cap and trade (4,4)

Answer 51

1. reduction in pollution is highly possible/more certain
2. govt can gradually decrease the number of permits to give firms time to solve the pollution problem
3. more cost effective than regulation as most of the greenhouse gases are reduced by firms that can reduce emissions using relatively low cost procedures
4. promotes cleaner and greener tech to reduce pollution by providing firms with incentives to sell their permits for profit
5. high cost of monitoring and is subject to many technical difficulties (eg. if too many permits, it wont work)
6. hard to set cap for different types of pollutants because of debates on how harmful each is for the earth
7. high administration costs due to need for regulation (firms might try to deceive regulators than pay for the permits)
8. must distribute permits without preferential treatment

Question 52

what is a merit good

Answer 52

a good that is deemed socially desirable by the govt and are likely to be underconsumed or underproduced if left to the free market

Question 52

joint provision of merit good by govt + answering format + graph

IMPT PT 6

Answer 52

1. involves govt supplementing what is provided by the private sector
2. even though the private sector has the incentive to produce/sell the good, the free market equilibrium output is lower than the socially optimum level
3. govt seeks to achieve alloc efficiency by being a supplier of merit goods
4. when the govt supplements the private sector, the supply of the merit good increases from S0 to S1, leading to an increase in market output towards the socially desired output level from Qe to Qs via the price adjustment process
5. eliminating dwl and achieving allocative efficiency
6. lower price also improves equity due to greater affordability

graph 18

Question 53

direct provision of merit good at $0 + answering format + graph

Answer 53

eg. covid vaccine

1. when there is excessive income inequality or significant positive externality, the govt may directly provide the good and make them available at 0 price (by giving subsidy)
2. due to high positive externality in consumption, there will be underconsumption at Qe if left to the provision of the private sector
3. govt will set the price to 0, and quantity demanded increases to Qfoc=Qs
4. DWL eliminated and allocative efficiency achieved

graph 19

Question 54

advantages and limitations of direct/joint provision (mainly for joint) (1,5)

Answer 54

1. govt has direct control over the supply of the good or service including its affordability and quality
2. govt is unable to perfectly correct the under consumption as it is difficult to measure the size of the external benefits and extent of underconsumption arising from imperfect info
3. production might be inefficient as employees of the state have little/no incentive to keep costs at a minimum due to lack of profit motive (x inefficient)
4. use of govt funds that rely on take revenue (incur opp cost)
5. hard to withdraw if it has been supplied in the long term
6. must ensure that it does not stifle innovation/improved efficiency that private firms may bring to the market

Question 54

direct provision of public goods + answering format (4) (no need)

Answer 54

1. due to zero-provision of public goods, the only feasible option is to provide these goods and services directly and fund them through taxes because public goods are non excludable, non rivalrous and non rejectable once provided
2. to decide whether or not to provide a particular good, the govt needs to weigh the total social benefits against the total social costs
3. to decide whether or not to provide an additional unit of the good, the govt needs to weigh the MSB against the expected MSC of undertaking the additional activity
4. efficient allocation occurs when MSB = MSC

Question 55

advantages and limitations of direct provision of public goods (1,5) (no need)

Answer 55

pros:
1. without govt intervention, the good will not be provided and there will be a significant loss to society’s welfare
eg. street light impact on safety

cons:
1. benefits and costs of providing the public good is highly uncertain (difficult to measure the size of the MPB because there is no effective demand due to the free rider problem)
2. hard to put monetary value on things like safety
3. depends on surveys/votes but ppl might conceal their desire of the good because the free rider problem incentivises consumers to conceal their willingness to pay
4. MSB from one unit is not limited to only 1 person but to all who are consuming that unit
5. must be financed with taxes
6. non rejectability (ppl that dont want it still need to accept it, eg. living near a firing range for national security)

Question 55

Deregulation by reducing BTE for market dominance + answering format + graph

Answer 55

1. govt deregulates access to ensure that firms continue to compete amongst themselves (eg. grant more licenses so there are more businesses)
2. entry of new firms will cause the demand for the exisitng firms product to fall
3. demand for the firms products will also become relatively more price elastic as more substitutes are available
4. leftward shift of the firms demand curve
5. at new profit max quantity and price, price will fall and profit will fall
6. less ability for firms to exploit the consumers through higher prices
7. DWL also decreases from area 1 to area 2, increasing allocative efficiency

graph 20

Question 56

pros/cons of deregulation (3,1)

Answer 56

1. increased competition results in a reduction in different between the existing firms profit max price and marginal cost (hence exploitation and alloc inefficiency are reduced)
2. fall in profits will cause firms to have greater incentive to be X efficient
3. income distribution will be more equitable because profits will be spread among more firms
4. lower profits will affect firms ability to do R&D and affect dynamic efficiency

Question 57

Anti trust laws explanation

Answer 57

1. regulating anti competitive conduct by companies
2. prohibiting predatory pricing etc, such that current rival firms will not get forced out of businesses
3. supervising mergers and acquisitions (eg. prohibit merger, allow merger subject to granting licenses to more companies so more firms can enter, break up big firms into smaller firms)

Question 58

Disadvantages of anti trust laws (2)

Answer 58

1. difficult and costly to prove that companies are engaging in anti competitive behaviour
2. might also prevent benefits of merger to be enjoyed, where cost savings due to IEOS could lead to lower price for consumers

eg. cannot tell if fall in price is due to lower cost of production, fall in demand or predatory pricing
eg. cannot tell if firm is leaving because of predatory pricing or because they themselves are inefficient

Question 59

explanation of regulations on standard of provision + disadvantages

Answer 59

to guarantee quality of product/service provided in monopoly markets
eg. penalise transport companies through the frequency of breakdowns

hard to enforce, difficult and expensive
penalties must also be sufficiently harsh

Question 60

Price regulation (MC or AC pricing policy) + answering format + graph

Answer 60

1. govts can require firms to employ MC pricing, which is to set price at MC or employ AC pricing, which is to set price at AC

MC: (P=MC)
- socially optimal quantity Qs is achieved because consumers MB from the last unit sold is equal to the MC of producing the last unit
- however, at Qs, since AR is less than AC, the monopolist may face losses unless the government subsidies the producer

AC: (P=AC)
- monopolist will be able to break even
- but output level will still be less than the socially optimum output Qs

graph 21

Question 61

mc/ac pricing pros and cons + way to solve mc pricing

Answer 61

pros:
1. both ac and mc pricing reduces price and increases output which increases consumer surplus and hence consumer welfare

cons:
1. if mc pricing is used, monopoly will make subnormal profit and the govt has to subsidise it or it will shut down (opp cost)
2. if ac pricing is used, monopoly can make normal profits but socially optimal output is not reached
3. firm may withhold or distort info by overstating its costs

one way to solve mc pricing
- charge a one time flat registration fee on top of per unit usage price of P=MC
- one time charges can offset the subnormal profit from the MC pricing

Question 62

Lump sum tax to reduce excessive monopoly profits + disadvantages + graph (4)

Answer 62

1. fixed tax amount regardless of output level (fixed cost for the firm)
2. it will shift the AC curve upwards
3. profits reduced from area 1+2 to area 1
4. area 2 represents tax paid to the government
5. less ability and incentive for research and development which leads to dynamic inefficiency

graph 22

Question 63

indirect subsidy to increase monopoly’s output towards allocative efficient level + disadvantages + graph (3)

Answer 63

1. per unit subsidy which shifts both AC and MC curves downwards
2. required level of subsidy will be that which shifts the MC curve downwards to the point where the MC-subsidy curve intersects MR at output Qs
3. achieving allocative efficiency
4. subsidies further increase the supernormal profit of the monopolist and worsens income distribution

graph 23

Question 64

nationalism meaning

Answer 64

transfer in ownership of a firm away from the private sector and towards govt ownership

Question 65

advantages and disadvantages of nationalism (3,2)

Answer 65

1. govt can act in the interests of the public to promote equity (ensure that prices are lower and output is greater than under an unregulated monopoly)
2. result in higher investment than if it were under private ownership when the govt provides funds for investment (eg. from tax revenue) (eg. MRT system investment)
3. helps to protect strategic industries (eg. water)
4. nationalised firms are more inefficient that private industries as profit maximisation is not the main objective (less focus on being productively efficient) and they are protected from competition
5. suffer from moral hazard which occurs when indivs/firms are insured against their own inefficient behaviour (eg. govt cover losses with subsidies)

Question 66

solutions for externalities (14)

Answer 66

1. taxes (negative prod./negative cons.)
2. subsidies (positive prod./positive cons.)
3. legislations/law (negative prod./negative cons./positive cons.)
4. tradeable permits (negative prod.)
5. joint provision of merit goods
6. direct provision of merit goods
7. direct provision of public goods
8. deregulation (reducing BTE)
9. anti trust laws
10. regulations on standards of provision
11. mc/ac pricing
12. lump sum tax to reduce monopoly profits
13. indirect subsidy to increase monopoly output
14. nationalism

Question 67

solutions for info failure

Answer 67

1. education and campaigns
2. laws to address consequences from asymmetric info

Question 68

education and campaign (for imperfect info and asymmetric info) (4, 4)

Answer 68

imperfect
1. govt influence behaviour through public education and campaigns
2. it is hoped that through education and campaigns (explain in context), consumers who are more accurately informed will seek to maximise their self interests by in/decreasing their demand for these services from DD0 to DD1, and perceived MPB will align with actual MPB
3. causing firms to produce at levels that correspond with the socially optimal output
4. DWL is eliminated, and is more allocatively efficient

asymmetric
1. govt can directly supply info to consumers through avenues such as posters, mass/social media
2. it is hoped that through _____ (explain in context), consumers who are more accurately informed will seek to maximise their self interests by in/decreasing their demand for these services from DD0 to DD1, and perceived MPB will align with actual MPB
3. causing firms to produce at levels that correspond with the socially optimal output
4. seek to influence demand so that the socially desired output level will be achieved and the DWL arising from under/over consumption will be eliminated

Question 69

pros/cons of education/campaigns (1,3)

Answer 69

pros:
- if info failure is the root cause, then this will effectively target the problem

cons:
- difficult to disseminate all the necessary info to consumers
- costly
- only effective in the long run as it takes a long time to influence mindset

Question 70

laws against adverse selection (general goods) + cons (4,1)

Answer 70

1. to prevent a missing market from arising or an over representation of bad quality goods and under representation of high quality goods, govt can pass consumer protection laws (eg. lemon law)
2. protect consumers against defective foods that fail to conform to contract/are only satisfactory at the time of purchase
3. consumer can make a claim for the defective product sold within a few months of purchase (eg. refund/replacement)
4. law reduces the incentive of the seller to lie about the quality of their products

cons
1. sellers might opt not to sell their products in countries with lemon laws and consumers in those countries might face a reduce range of goods

Question 71

laws against adverse selection (health insurance) (6,2)

Answer 71

1. over representation of unhealthy buyers and vice versa
2. mandatory for Singaporeans to participate in MediShield Life
3. by making it compulsory, it reduces adverse selection gaps found in voluntary schemes
4. consumers also mandated to provide accurate and complete info regarding the existing state of their health to calculate the premiums and subsidies each indiv has to pay/receive
5. revenue from healthy indivs can be used to offset claims from unhealthy indivs (still profitable for producer)
6. removes the missing market

cons
1. can lead to hospitals pressuring patients to opt for unnecessary medical care since the govt/insurance will cover part of the cost
2. lack of privacy

Question 72

solving moral hazard problem (2,1)

Answer 72

1. govt can make it compulsory for the buyer of insurance to pay part of the cost of damages
2. make buyer face consequences of irresponsible or risky behaviour and hence they have less incentive to engage in stupid behaviour

cons
1. while copayments increase awareness of treatment costs, it prevents the sick and disadvantages from accessing needed care (co payments cannot be so high as to deter consumers from seeking appropriate healthcare or worsen equity)

Question 73

policies to reduce occupational immobility + cons (no need)

Answer 73

1. govt invest in training schemes for the unemployed to boost their human capital (eg. skills future) so they have more skills that can be transferred from one job to another
2. subsidise the provision of vocational training to raise skill level of the unemployed

cons
- require a long time for effects to be seen
- dependent on receptivity of policies
- need a lot of govt funding (opp cost/debt)

Question 74

policies to reduce geographical immobility (no need)

Answer 74

1. relax immigration policies and restrictions
2. improving housing market (reduce cost of rented property/increased supply of affordable property)

etcetc

Question 75

policies to ensure greater income equality and equity (no need)

Answer 75

1. minimum wage law
2. increase productivity of workers
3. reduce supply of low skilled workers
4. tax and subsidies
5. price control for necessities
6. govt provision

Question 76

min wage (no need)

Answer 76

1. min wage to be set above the existing equilibrium wage rate
2. with higher wage rate, employment falls and unemployment of QdQs results
3. lead to productive inefficiency since labour resource is not used to max capacity
4. only benefits those who can retain jobs as they will get a higher wage

Question 77

increase productivity of works
reduce supply of low skilled workers (no need)

Answer 77

1. training programmes to upskill
2. since demand for high skilled workers are higher, this will increase demand for labour and increase wages
3. charge levy for employment of foreign workers/limit work passes issued
4. lower supply of low skilled foreign talent, increase wage

Question 78

taxes to reduce income inequality + cons (no need)

Answer 78

progressive tax system

• those that earn more are taxed more
• but reduce reward for the work effort and saving of high income individuals
• effect of reducing quantity of labour offred in the market and willingness to save
• high administrative cost of running the redistribution programme

Question 79

price controls for necessities to reduce inequality 2 examples (no need)

Answer 79

eg 1. price control on rent
- landlords might let their property fall into disrepair by cutting maintenance costs
- hard to determine who gets the rental at a lower rent

eg 2. min price for grain
- large commercial farmers might benefit more than the small low income farmers which have negligible market share

Question 80

govt provision to reduce inequality (no need)

Answer 80

1. poverty due to lack of education or healthcare
2. govt provide those for them

Question 80

subsidies to reduce income inequality + cons (no need)

Answer 80

1. cash benefits: subsidies to income (eg. income supplement for low income workers)
2. benefits in kind: goods/services provided free or at reduced price for low income households (eg. healthcare, food stamps, free transportation)

cons
1. strain on govt funds (from tax revenue)
2. some ppl would rather collect the welfare payments than work (less incentive to upskill and earn more)

Question 81

4 policies for singapore traffic congestion and air pollution

Answer 81

1. ERP
2. COE
3. Public transport
4. Comprehensive road network and maximising its capacity

Question 81

main aim of policies to reduce income inequality (no need)

Answer 81

redistribute income from high income groups to lower income groups

Question 82

problems with traffic congestion and air pollution

Answer 82

1. if left to the free market, usage of cars will be higher than the socially desirable level of usage due to the significant negative externalities of production generated

Question 83

ERP + graph

Answer 83

1. works like a tax which has the effect of increasing the MPC
2. congestion charge equivalent to the MEC at Qs is deducted whenever a vehicle uses a priced road
3. motorists are encourages to decide whether/where/when to drive
4. those who choose to pay will enjoy a smoother ride
5. all the external costs are internalised by the driver and the allocatively efficient level of Qs is achieved

graph 24

Question 84

COE + graph

Answer 84

1. quota which limits car ownership and the number of cars on the road
2. to own a car, buyers have to purchase a COE (that lasts ard 10 years)
3. COE can limit the max number of cars traded to Qs and mitigate traffic congestion

graph 25

Question 84

pros and cons of erp (3,2)

Answer 84

pros
1. most direct way of tackling congestion as it tackles car usage
2. through regular rate reviews, erp charges are adjusted up and down to keep traffic flowing smoothly while not underutilising the roads
3. fair as charges are only for those who choose to use the road

cons
1. public rejection (charge for a road that was once free)
2. building of erp gantries incur a cost

Question 85

COE pros and cons

Answer 85

pros
1. limiting no. of cars on the road can reduce air pollution and create a more efficient transport network
2. COE revenue goes to the govt and can be used for financing other things

cons
1. congestion is due to car usage and not the possession of cars (hence this is a blunt instrument as ownership controls will not make a big different unless it is curbed significantly)
2. might actually cause increased car usage due to the sunk cost fallacy (since already spend so much, ppl will use the car very intensively to compensate for the loss incurred from the COE premium)
3. causes rise i price of cars which is politically unpopular as it prices out the middle to lower income consumers
4. displaces the price mechanism and output is no longer responsive to changes in price and since govt does not have perfect info it might not be fully effective

Question 86

providing quality public transport systems + 2 cons

Answer 86

1. provide an attractive public transport system to encourage ppl not to use their cars (fast, efficient, comfortable, affordable)
2. govt continually expands rail and bus network systems
3. but is expensive and takes a long time to build the infrastructure

Question 87

providing comprehensive road networks and maximising its capacity + 3 cons

Answer 87

1. build new roads and widen existing roads
   - helps to distribute traffic flows and minimise road congestion benefiting both private and public transport
2. Expressway monitoring advisory system
   - tech to detect accidents, breakdowns etc and notifies road users using the signboards etc.

cons
1. limited land space to expand roads
2. expensive
3. takes a long time to build the infrastructure

Question 88

govt intervention for education + some explanation (6)

Answer 88

1. compulsory education
2. direct provision with subsidies
   - citizens pay a lot less than prs etc.
3. edusave (direct subsidy)
   - yearly contributions in their edusave account
   - used to pay for approved fees and enrichment programmes
4. fas
   - financial assistance to low income families so that they can all benefit from the best education
5. increasing affordability of preschool
   - increase supply of preschool slots
   - subsidies for preschool education for more households
   - fee caps on full day childcare fees
6. additional support for low income families
   - outreach workers help families search for affordable preschools and help with the enrolment process
   - kidSTART programme teaches parents how to nurture their children and also creates playgroups for kids

Question 89

govt intervention in healthcare (6)

Answer 89

1. subsidies for all sg citizens
2. medisave
   - can be used to pay for healthcare costs
3. medishield life
   - basic health insurance scheme where the premiums can be paid with medisave
4. medifund
   - govt fund for those that still cannot pay for medical costs after subsidies and claims
5. eldershield and careshield life
   - provides ppl with payouts in the event of severe disability
6. elder fund
   - greater funds for severely disabled and low income sg citizens

Question 90

progressive wage model + aims

Answer 90

to reduce income inequality

• increases wages of workers through upgrading skills and improving productivity
• as a worker undergoes training and becomes more skilled over time, wages will rise according to the scale set by the framework
• help to uplift low wage workers
• higher productivity improves business profits for employers and service buyers also enjoy better service standards and quality

Question 91

government failure meaning

Answer 91

situations where govt intervention in the free market increases market distortions and reduces economic efficiency and welfare and leads to worsening of the allocation of resources

Question 92

reasons for government failure (6)

Answer 92

1. unintended consequences not addressed
2. imperfect info
   - imperfect info on benefits, costs, risks and uncertainty
   - policies implemented do not result in efficient outcomes
   - sunk cost fallacy
3. inefficiency of govt intervention
   - administrative costs
   - if state employs too many resources or uses them inefficiently, economic welfare will be reduced
4. time lags
   - takes time for a govt to recognise market failure
   - by the time policies are implemented, the problem might already be very bad
5. shifts in govt policy
   - not effective if govt policy keeps changing (eg. tax rates)
6. rent seeking
   - corrupt govt might try to maximise their own self interest instead of maximising societal welfare

Question 93

application to behavioural economics (5)

Answer 93

1. increasing salience
   - make it more noticable (eg. gory image on cigarette packaging, ERP charge makes a beep)
2. ensuring convenience
   - make sure the intended option is the most convenient one (eg. covid vaccine in all CCs)
3. appealing to loss aversion
   - taxing sugary drinks more effective than subsidising healthy drinks as consumers place more value on the loss of a given amount of income
4. make it social
   - show that most ppl perform the desired behaviour (eg. covid vaccine give sticker)
5. make it timely
   - must inform ppl immediately (eg. water monitoring device compared to educational campaign)