2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

EQ5 on Market Structure

(a) With the use of an example, explain the concept of price discrimination and the conditions
under which it may occur.
[10]
L1: Define price discrimination and identify conditions for price discrimination [1 2]

Price discrimination refers to the practice of a firm charging different prices for the same product
to different buyers for reasons not associated with differences in costs

L2: Explain the conditions for price discrimination [3 - 6]

The firm must be a price setter source of market power comes from imperfect information,
product differentiation or significant market share applies to all types of market structure except
perfect competition

Different buyers must have different price elasticity of demand a higher price is charged for
buyers with a relatively more inelastic demand seller earns more profit than charging a uniform
price for all buyers

The firm must be able to segment the market the seller must be able to clearly identify and
distinguish the buyers with more inelastic demand from the buyers with less inelastic demand

There should be limited seepage between buyers the markets must be separated by either like
time, transactions costs or transportations costs or artificial barriers tickets, IDs etc.

L3: Illustrate the conditions with an example (i.e. only one example) [7 10]

An example of price discrimination (3rd degree) is where the cinema gives senior citizen
discounts for certain screenings

The cinema is a price-setter because its service might be differentiated (e.g. better location,
more comfortable seats, better show times etc) or because it has large market share (e.g.
Golden Village has cinemas in most major shopping centres in Singapore)

Senior citizens tend to be retired they have little or no income cost of a cinema ticket will
form a higher proportion of income compared to a working adult the demand is relatively more
elastic tickets prices are lower

The senior citizen can be identified and segmented from other movie-goers because he looks
old, or the purchase of the ticket requires some identity card with proof of age

Resale of tickets can be prevented if the ticket clearly state that it is for senior citizens and the
cinema staff also checks the ID before allowing ticket purchase or entry it is not feasible for a
non-senior citizen to ask a senior citizen to buy a ticket on his behalf

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

(b) Discuss the view that a perfectly competitive market is always preferred to a price
discriminating monopolist.
[15]
L1: Define perfect competition and monopoly [1 3]

Refer to lecture notes for the definitions of the two different market structures

L2: Explain why perfect competition may be preferable [47]

There is equity as such firms earn only normal profits in the long run

There is X-efficiency as any failure to minimize costs is inevitably punished by the intense
competition so such firms must produce on the LRAC to stand the highest chance of surviving

There is productive efficiency as such firms must produce at the MES in the long run

L3: Analyse why a price discriminating monopolist may be preferable [8 11]

Output could be higher and price lower for monopoly than for a perfectly competitive industry due
to substantial EOS

There is product variety as the monopolist could be cross-subsidising one variant of a product
with another, be engaging in product proliferation to deter entry or could be producing a variant
that would not be profitable without price discrimination

There is innovation as the monopolist could be earning LR supernormal profits that provides the
incentive and ability to engage in R&D (with price discrimination, supernormal are even higher,
hence further raising such incentive and ability)

E: Evaluate whether perfect competition is always preferable than a monopolist [11 15]

It seems that prefect competition may not always be better than monopoly as the latter could
result in more output, choice and innovation and lower prices

However such a comparison may be unfair because for perfect competition to exist, there must be
product homogeneity and low entry barriers, which means that product choice and innovation
must inherently be absent and EOS must be limited

At the end of it all, perfect competition hardly exists in reality and is merely a theoretical model to
illustrate the benefits of competition

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

EQ 6 on Market Failure
(a) Explain how land, sea and air pollution are examples of negative externalities and why
pollution can essentially be seen a problem of unmanaged scarcity or resources.
[10]
L1: Define negative externalities and scarcity [1-3]

Negative externality refers to the adverse effects imposed on third parties from the production or
consumption of the good

Third parties are people who are not directly involved in the transaction of the good.

Scarcity refers to the situation where a resource is insufficient to meet the wants and needs of
society.

L2: Explain how air, land and sea pollution are examples of negative externalities [4-6]

Land: littering in public places passers-by suffer from the eyesore and bad smell

Sea: oil spill fisherman suffer from reduced a catch, nearby seaside towns suffer from bad
smell and reduced tourist revenue

Air: smoke from chimneys residents in the area suffer from health ailments.

L3: Analyse how pollution can be seen a being problem of scarcity [7-10]

It is not possible to assign property rights for common resources like air, sea and public spaces

When pollution exceeds a certain threshold, clean land air and sea become scarce because the
amount available is insufficient to meet the wants and needs of society

When polluters do not pay for dumping their wastes price of clean land, air and sea is
essentially zero quantity demanded for clean air exceeds the quantity supplied shortage of
clean air non-polluting third parties are unhappy because they have insufficient amount of
such resources to enjoy

Due to the lack of property rights, common resources are non-excludable the price
mechanism cannot work the market is unable to allocate clean land, air and sea among
competing uses market failure

(b) What help, if any, can economics be to policy makers in developing anti-pollution
policies?
[15]
L1: Identify relevant policies to manage pollution [1-2]
Policies include output taxes and emissions charges, direct controls & tradable pollution permits etc
L2: Describe relevant policies to manage pollution [3-6]

Output tax raises price and reduces output with less production there is less pollution

Emission charges tax on pollution itself firms cut pollution to avoid paying the charges

Direct controls rules and regulations are set on the amount pollution generated firms cut
pollution to avoid paying fines or other penalties

Tradable permits permits are given for the right to pollute a certain amount permits are
tradable between firms pollution can be reduced by reducing the amount of permits issued

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

L3: Analyse the usefulness of economics in developing anti-pollution policies [7-11]

Provides policy makers with the concept of what is socially optimal and thus how to achieve it
o

Negative externalities SMC > PMC

Private equilibrium PMB = PMC; Social equilibrium SMC = SMB

By imposing a tax = EMC, PMC is shifted to PMC (as in fig 6 in the lecture notes)
output is reduced from the private equilibrium to the social equilibrium

Enables policy makers to know which policy is more suitable for a given context
o

Emission charge enables pollution abatement to be achieved at the lower cost to

society than direct controls but may involve high monitoring costs more useful when
there are only few polluters

Output tax output is easier to monitor than emissions more feasible than emission
charges when there are there are many polluters however not a good long run solution
as there is no incentive for polluters to adopt cleaner technologies

Direct controls low monitoring costs and greater certainty in outcome useful when
there is a very large number of polluters involved e.g. curbing car emissions or when the
externality is very severe e.g. laws to ensure proper disposal of nuclear wastes

Pollution permits certainty in outcome and enables pollution reduction to be achieved at

the lowest costs to society but involves high monitoring cost if there are many polluters

Provides methodologies like cost benefit analysis to help estimate which policy option generates
the highest net benefit to society

E: Discuss the limitations of economics in facilitating anti-pollution policy-making? [12-15m]

Economic analysis, while helpful as it provides insights which often cannot be achieved with just
common sense, nevertheless has its limitations
o

Imperfect information estimation of external costs and benefits can be very subjective
social equilibrium is only a theoretical possibility but impossible to determine accurately
in reality pollution targets are more likely based on scientifically or politically determined
targets rather than socially optimal targets

Economic modelling often cannot cope with the complexity of real world problems
policy makers still rely mostly on common sense or may concurrently employ a variety of
policies if they are uncertain as to which policy really works best.

Policy makers may be more concerned with politics more politically acceptable policies
are often chosen over more socially efficient ones

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

EQ7 on Market Failure

"In 1994, the UK government decided to spend 12m to protect a river from industrial and
sewage pollution and to protect the surrounding properties from flooding."
(Source: The Independent 04/08/1994)
(a)

Explain private goods and public goods and how flood prevention should be classified. [10]

L1: Define private and public goods and the concepts of rivalry and excludability [1-2]

Pure private goods rival and excludable; pure public goods non-rival and non-excludable

Rival consumption of a good by one person diminishes the amount or quality available to others

Excludable possible to prevent a person who has not paid from consuming the good

L2: Explain private and public goods by using examples to illustrate rivalry & excludability [3-5]

Food is an example of a pure private good

o

Excludable the seller can refuse to give the food to a person who has not paid for it.

Rival once a food item is eaten, that item does not exist anymore for others to consume.

A lighthouse is an example of a pure public good

o

Non-excludable it is not possible to prevent ships who are nearby from seeing the light

Non rival the brightness of the light does not diminish with the number of ships.

L3: Analyse whether flood prevention is a private of public good [6-10]

Example of a flood control measure building of river embankments reduces the probability
of flooding people around the river enjoy a higher level of safety from flood damage

Flood control is non-excludable as a firm cannot force firms and households near the river to pay
for building the embankment

Flood control is non-rival as once the embankments are built, the safety enjoyed from flood
damage remains unchanged regardless of the number of buildings and peoplein that area

Since flood control is non-excludable & non-rival classified as a public good.

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

(b)

Discuss how such forms of government intervention can lead to more efficient use of
resources.
[15]

L1: Identify and define the sources of market failure and the possible solutions. [1-3]

River pollution is a form of negative externalities, which can be defined as the cost imposed on third
parties from the production or consumption of a good.

Anti-pollution policies include output taxes, emissions charges, direct controls

As flood control is a public good, the only solution is free public provision of anti-flood
infrastructure

L2: Explain how such market failures lead to allocative inefficiency [4-7]

Negative externalities SMC lies above PMC by EMC private outcome > social outcome
overproduction deadweight losses

Public good those who do not pay for flood control will still enjoy flood prevention most will
free-ride & not pay without enough financing, flood control infrastructure will not be built all
welfare that could be generate from flood control will not be generated total market failure

L3: Analyse how anti-pollution and flood control policies can achieve allocative efficiency [8-11]

Anti-pollution policies
o

Impose output taxes of EMC PMC shifts up output is reduced to the social
outcome deadweight loss is recovered

Direct controls legally set output at socially optimum levels

Rather than control output, emission fees and quotas can be used instead

Flood prevention policies

o

The SMB of flood control rises falls with more resources devoted to it e.g. the higher the
embankments, the lower the reduction in the likelihood of the river bursting its banks

However, the SMC of flood control also rises with more resources devoted e.g. the higher the
embankments, the more costly it is to build and maintain these embankments

The government socially efficient level of flood control is where SMB = SMC

E: Discuss the limitations of government intervention in correcting market failure [12-15]

Imperfect information estimations of EMC and EMB are subjective socially optimal level
is difficult to ascertain in reality intervention may be insufficient or excessive

Policies incur administrative costs of monitoring and enforcement such costs may not be
properly accounted for intervention may end up ineffective due to weak enforcement or
being unnecessarily costly to administer in the long run

Due to political considerations, government may choose the socially most expedient policy
rather than the socially most efficient one.

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

EQ 8 on National Income Statistics (N2000Q6)

(a)

Explain how the three concepts of National Output, National Income and National
Expenditure can have identical values although measured in different ways.

[10]

L1 Define the different approaches to measuring national income [1-3]

The income approach measures the payments made by firms to households in factor markets in
the form of wages, rents, interests and profits

The output approach measures the value of the output contributed by the primary sector,
secondary sector, and tertiary sector

The expenditure approach measures the payments made in the product market which consists of
consumption (C), investment (I), government spending (G) and net exports (X-M)

L2: Explain why national output is equivalent to national income [4-7]

Using the concept of the circular flow of income (refer fig 1 in NIS lecture notes), explain how
spending and income is channelled from firms to households and then back to firms

Also explain why the circular flow remains intact despite injections and withdrawals e.g. savings
of households are channelled via financial markets to other consumers or firms, which would then
use the money to buy goods and services or hire resources

L3: Illustrate with an example why national output is equivalent to national expenditure [8-10]

Expenditure method measures the value of final goods and services only e.g. the price of milk
sold at the supermarket

The price of the final good actually pays for the cost incurred at the different stages of production,
e.g. price of the bottle of milk actually pays for the cost of rearing cows (primary sector),
processing the milk and manufacturing the bottle (secondary sector) and the retailing services of
the supermarket (tertiary sector)

Hence measurement using the output approach should generate the same total value as that
using the expenditure approach

2010 TJC JC1 Economics Pre Promo Revision Essays Part 2

(b)

How useful are measures of GDP for indicating changes in living standards within a
country?
[15]

L1: Define GDP and identify the different problems with using it to measure SOL. [1-2]

GDP refers to the value of output generated by resources located within the geographical
boundaries of the country

Measuring SOL has calculation and interpretation problems

L2: Explain how changes in real per capital GDP measures changes in living standards [3-5]

Changes in real GDP per capita can be obtained by accounting for inflation and population growth

Real GDP per capital average income or average output

o

Income ability to purchase consumer goods consumption

Output amount of consumption goods

L3: Analyze the problems with using GDP as a measure of living standards [6-11]

Explain at least two calculation problems

o

Inaccuracies in data collection

Underground economy

Non-marketed economy

Explain at least two interpretation problems

o

Problems with interpreting material SOL income distribution, composition of output,

utility from existing assets, quality of products,

GDP does not measure non-material aspects climatic differences, leisure and stress,
negative externalities, intangibles like social and political freedom

E: Evaluate the usefulness of GDP as a measure of changes in living standards [12-15]

Specific welfare indicators e.g. infant mortality and adult literacy etc are too narrow in scope
and can only be used to support & not replace GDP

Composite indicators like MEW and HDI, while more holistic are more subjective because
they attempt to measure intangibles and also because the weights assigned to each
subcomponent is subjective

Hence despite its flaws, real GDP per capital may still arguably be the most cost efficient and
reliable single indicator to assess changes in living standards so it still very useful in fact
economist still rely on this indicator more than any other indicator