Question 1: The Rapeseed Dilemma

Extract 1: EU biofuel market

The European Union (EU) is the world’s largest biodiesel producer. Biodiesel is also the most
important biofuel in the EU and, on an energy basis, represents about eighty percent of the total
transport biofuels market. Biodiesel was the first biofuel developed and used in the EU in the
transportation sector in the 1990s.

Rapid expansion of the biofuel market was driven by generous tax incentives for farmers growing
biofuel crops as well as increasing crude oil prices. EU biofuels goals set out in
the Renewable Energy Directive establishes an overall policy for the production Intended
and promotion of energy from renewable sources in the EU. It requires the EU Consequence
to fulfil at least 20% of its total energy needs with renewables by 2020. With the
rapid expansion of biofuel market, rapeseed became the dominant biodiesel Unintended
feedstock in the EU accounting for 46 percent of total production in 2016. Consequence: biofuels
However, demand for biofuels made from food crops, such as palm and and food crops are in
competitive SS 
rapeseed, has led to an increase in global food prices and needs to be curbed,
rising global food P 
according to a new analysis. rising COL
EV: How to overcome unintended
consequence? Subsidies to low
Source: USDA Foreign Agriculture Service Y consumers and firms to
and European Commission produce food crops

Extract 2: The future of the Renewable Energy Directive

Talks over how to decarbonise the EU’s transport fleet are heating up. As policymakers prepare the
bloc’s renewable energy targets for 2030, part of the debate has revolved around the role of biofuels.
And farmers are getting increasingly vocal. Vehicles in Europe currently run on a mix of fossil fuels,
biofuels and electricity. Under the 2009 Renewable Energy Directive (RED), the EU committed to
generating 20% of its energy mix from renewable sources, while capping the share of biofuels used
in the transport sector at 7%.

The aim of the policy was to decarbonise the transport sector, but it has always Benefit: reduce MF,
been controversial. As the directive comes up for renewal, the debate over its sustainable EG, rising SOL
achievements is still raging. While biofuels burn more cleanly than fossil fuels,
producing less carbon dioxide and other pollutants, critics argue this is just one Constraint: hidden
side of a bigger issue. On the other side, they say, are hidden carbon emissions pollution from ILUC
from indirect land-use change (ILUC), as biofuels displace food production and
farmers are forced to reclaim land from carbon-rich ecosystems such as forests
Unintended Consequence
and peatlands, as well as negative societal impacts such as increased food
prices.

Source: https://www.euractiv.com, 2017

PED for crude oil >1 due to biofuel, and

Table 1: EU Consumption of Biofuel and Crude Oil other energy sources being its substitutes

Year Biofuel Consumption (million tons) Crude Oil Consumption (1000 barrels/day)
2009 11700 14000
2010 13100 13900
2011 13658 13500
2012 14467 13100
2013 13198 12850
2014 13997 12460

Source: BP Statistical Review of World Energy

Extract 3: Why biofuels can’t replace oil

While biodiesel has emerged as a strong contender to replace crude oil, not all Constraint: incompatibility
diesel vehicles are compatible with biodiesel or its blends with motor vehicle with biodiesel
diesel. Vehicle manufacturers generally accept the use of motor vehicle diesel
containing up to 5% biodiesel to power their vehicles. However, a higher PED for crude oil <1 in SR
biodiesel content may cause incompatibility problems to certain vehicle models.
Subject to the advice of vehicle manufacturers, the incompatibility problems could EV: How to overcome
be overcome by replacing certain engine components. incompatibility
Source: https://www.epd.gov.hk, 2015 constraint

Extract 4: The boom of the rapeseed industry

The rapeseed oil industry was valued at $23.76 billion (€21.83bn) in 2014, and is expected to reach
$35.39 billion by 2021. Rapeseed oil is extracted from rapeseed crop which is the third largest crop
cultivated in Europe. The global industry for rapeseed oil is anticipated to witness rapid growth. This
growth will be driven by the discovery of rapeseed oil’s various health benefits and advantageous
properties, such as its use in biodiesel production, as vegetable oil in food, and other applications.

The increasing demand for biodiesel in particular is expected to promote growth

in the global rapeseed oil industry. Rapeseed oil is consumed on a large scale Change in T&P
in the region for the production of biodiesel due to growing concerns related to Rising DD for
fossil fuels. The shift in food consumption patterns from animal products to rapeseed due to
vegetables, grains, and fruits is due to health awareness among major parts of environmental-
the population. The health benefits offered by rapeseed oil, such as low consciousness and
cholesterol and help in reducing the risk of cardiovascular diseases, is driving health benefits
the consumption of rapeseed oil worldwide.

Source: Biofuels International, 25 October 2016

Table 2: Rapeseed in selected economies (Thousand Metric Tons)

Country/ Year Production (thousand metric Consumption (thousand metric

tons) tons)
2015/16 2016/17 2015/16 2016/17
China 14,931 13,500 19,100 17,200
India 5,920 6,950 5,930 6,800
Canada 18,377 18,500 8,726 9,739
European 21,997 20,397 25,220 24,750
Union
World Total 70,048 68,863 70,777 71,093

Falling world production (SS) and rising
world consumption (DD)  Qdd > Qss
 shortage  u/w pressure on P
EU is the largest producer and Source: USDA
consumer. Contributed to the
largest decrease in production
OR
Canada contributed to the
largest increase in consumption
Extract 5: The Rapeseed market

As grain and oilseed stocks continue to increase worldwide, the Unfavourable weather
rapeseed supply has been waning and is expected to tighten further in conditions  falling SS
2016/17. The global stockpile of rapeseed has shrunk by 30 percent
over the last year, and with lackluster harvest prospects for this year, change in P is certain & change
analysts have proposed that rapeseed prices are likely to rise through in Q is uncertain, depends on
mid-2017. extent of change in DD & SS

Rapeseed, also called canola for certain variants, is known for its rich oil
content. The oil is a primary ingredient in Europe’s growing biofuel Rising derived DD for
rapeseed used as FOP
industry and is one of the major vegetable oils for human consumption
globally. When processed for oil, its byproduct rapeseed meal is a Rising DD due to dietary needs
high-protein animal feed used mainly in China and Europe.  rise in DD > fall in SS

The rapeseed market is not overly optimistic for the European Union, the
Fall in rapeseed
world’s largest producer and consumer of rapeseed and its byproducts.
production by EU
Planted area for the autumn-sown seed is expected to be slightly down from which is the largest
last year. Planted area in major exporter Ukraine suffered immensely due to producer  fall in SS >
extremely dry conditions in the autumn. As a result, the harvest volume could rise in DD (supported
be cut by up to one-third on the year, before factoring in any potential gains or by Table 2)
losses to yield. Lower harvest prospects on the Eurasian continent will further
draw down the falling supply there.

Source: Reuters, 7 March 2016

Extract 6: High pesticide levels on rapeseed crops harm wild bees, scientists prove

Pesticides used on rapeseed crops are harming native populations of wild -ve ext  spill over costs
bees, scientists have conclusively proved. Species that feed most on the to 3rd parties (dwindling
flowers of the now-profitable cash crop used for vegetable oils, animal bee population)
fodder and biofuel production are down by as much as 30%, according to
the wide-ranging study published in the journal Nature.

The crop must be intensively managed for farmers to attain the high yields they need to maximise
profits, and that means high use of pesticides. In the case of rapeseed, many of these are of the
neonicotinoid variety that is under close scrutiny by the European Union for its links with declines in
bee populations. The scientists said the 30% decline in the most susceptible species examined was
attributable to neonicotinoid pesticide use. Overall, they found that neonicotinoids pesticides were
responsible for a 10% reduction in the distribution of bee species that forage on rapeseed. Rapeseed
is likely to be particularly damaging, according to the researchers, because the active compounds
of the neonicotinoid pesticides are not just applied to the surface but expressed in the plant’s tissues,
meaning that bees can ingest the chemicals in the nectar and pollen of affected crops.

Source: The Guardian, 16 Aug 2016

Extract 7: The imminent threat of dying bees

Populations of pollinators such as bees, butterflies and other species important for agricultural
pollination are declining, posing potential risks to major world crops, a UN body on biodiversity said
Friday. A report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem
Services (IPBES) stressed the importance of protecting pollinators to ensure stable fruit and
vegetable output, amid concern over the challenge of feeding the world’s growing population in
coming decades.
It said these pollinators are directly responsible for between 5-8% of global agricultural production
by volume, amounting to between $235bn and $577bn worth of annual output. In addition, more than
three-quarters of the “leading types of global food crops” rely to some extent on pollinators for yield
and quality. “Pollinator-dependent species encompass many fruit,
vegetable, seed, nut and oil crops, which supply major proportions of -ve ext  spill over costs to 3rd
parties (consumers suffer from
micronutrients, vitamins, and minerals in the human diet,” the IPBES
higher P of food due to
said. If the population of the pollinators were to decline, it could lead disruption to crops SS, and
to lower crop yields, raising prices for consumers and reducing farmers suffer from falling profit)
agricultural profits.

Possible policy options include better protection of natural Polices to correct MF arising
from rapeseed production 
environments and ecosystems through rules and regulation, limiting
reduce MEC  shift MSC r/w
the scope of intensive agriculture, and finding alternatives to and increase Qs  reduce
pesticides, the IPBES said. On the other hand, researchers opined overproduction of rapeseed
that a total ban on the use of neonicotinoid pesticides is needed to
halt both the obliteration of insect life and the sabotaging of our own
best interests. LIM of total ban on use of pesticides:
- constrained by large EU size 
Source: The Guardian, 26 Feb 2016 difficult to enforce and monitor
- costly to implement  incurs opp
EV: total ban does not tackle root cause of MF and difficult to cost and worsens EU budget and
overcome constraints and unintended consequences, NOT the best public debt
- better to use tax on pesticides as SR policy to internalise MEC, use
tax rev collected to finance R&D for alternative as LR policy

Questions

(a) With reference to Table 1, describe the trend in Biofuel consumption from 2009 to 2014. [2]

(b) (i) Why might the changes shown in Table 2 have led to analysts proposing ‘that rapeseed
prices are likely to rise through mid-2017’. [1]

(ii) Using the information in Table 2, identify the country or region that has had the greatest
impact on world prices. Justify your answer. [3]

(c) With reference to Extract 5, and using a demand and supply diagram, explain how the
combination of Europe’s growing biofuel industry and poor harvest is likely to have affected
the market for rapeseed. [7]

(d) Explain whether the change in the consumption of biofuel as shown in Table 1 might affect the
PED of crude oil. [6]

(e) Extracts 1 and 2 outline the effect of rising demand for biofuel on global food prices. In view of
this, discuss whether the EU government should continue with the Renewable Energy
Directive. [8]

(f) (i) Explain how the production of rapeseed can cause market failure. [6]

(ii) With reference to case material and/or your own knowledge, discuss whether a complete
ban on the use of neonicotinoid pesticides is the best way to address the problems arising
from production of rapeseed. [12]

[Total: 45]
(a) With reference to Table 1, describe the trend in Biofuel consumption from
2009 to 2014. [2]

Examiners’ Comments:
Almost all candidates scored well for this question. However, some mistakenly identified that
the trend was a “fluctuating” one, showing a misunderstanding of this term. Better answers
highlighted the reversal of the general trend in 2012.
Students’ answer (2m):
Biofuel consumption generally increased from 2009 to 2014. It was constantly increasing
until it fell from 2012 to 2013 before increasing again.

Suggested answer:
Overall, Biofuel consumption rose from 2009 to 2014. [1]
However, it fell from 2012 to 2013. [1]

Alternative refinement: Consumption peaked in 2012. [1]

(b) (i) Why might the changes shown in Table 2 have led to analysts proposing
‘that rapeseed prices are likely to rise through mid-2017’. [1]

Examiners’ Comments:
Majority of the students were able to link the concept of production to SS and
consumption to DD but many did not respond to the keyword ‘changes shown in table
2’ and use phrases like: ‘production (SS) higher than/ greater than/ more than
consumption (DD)’. Those phrases that do not show changes in DD vs SS as
highlighted in table 2 but only show the difference in level of DD vs SS. Thus those
answers were considered vague and thus did not score the mark.

It is also observed that there are some students who wrote at a lot for a 1m question.
Students should learn to be wise in their time allocation and learn to be succinct in
their writing.

Suggested answer:
Table 2 shows that production (supply) of rapeseed has fallen while consumption
(demand) of rapeseed has risen. This causes a shortage as quantity demanded
exceeds quantity supplied. Hence prices are likely to rise.

(b) (ii) Using the information in Table 2, identify the country or region that has
had the greatest impact on world prices. Justify your answer. [3]

Examiners’ Comments:
To gauge whether a country/region has had the greatest impact on world prices, students
should look at the following hints from given data:
1. The country/region that had the greatest contribution/proportion to world/total DD/SS
2. The country/region that shows the greatest change in DD/SS in alignment with the
overall change in world/total DD/SS.

While some students cited that China as the country/region that has had the greatest impact
on world prices due to the greatest change seen in fall of consumption of rapeseed, students
must note that this is contrary to the change observed in world DD (rise in world DD). Thus,
it could not be accepted as a correct response.
 Suggested answer:
European Union. [1] Table 2 shows that European Union (EU) has had the greatest
contribution to the world total production and consumption. As such, any changes in
production and consumption of Rapeseed in EU would have a significant impact on the world
production and consumption. [1] Furthermore, EU contributed to the largest decrease in
production which therefore resulted in the overall decrease in world total production as
compared to other countries/regions. [1] Thus EU has had the greatest impact on the overall
rise in world prices.

Alternative Answer (Max 2 m):

Canada. [1] This is so as it contributes the greatest rise in consumption of rapeseed as
compared to the other countries/regions. [1] This therefore resulted in the overall decrease
in world total consumption

(c) With reference to Extract 5, and using a demand and supply diagram, explain
how the combination of Europe’s growing biofuel industry and poor harvest
is likely to have affected the market for rapeseed. [7]

Examiners’ Comments:
Most students were able to explain how the poor harvest will affect supply of rapeseed.
However, some students were not able to see / did not explain how the growth of biofuel
will affect the demand for rapeseed. Another concern is that many students were not aware
/ did not see that the effect of the simultaneous shifts of both demand and supply will cause
an uncertain effect on the equilibrium quantity in the rapeseed market. Fewer were able to
explain how the relative extent of shifts on demand and supply curves will affect the
equilibrium quantity. Some better students were able to see the need to use case material
to justify the likely equilibrium quantity but fail to put in sufficient evidence on both demand
and supply to have a conclusive judgement on the equilibrium quantity. Students should be
cautioned not to use quantity demanded or quantity supplied when they mean equilibrium
quantity. There is also not need to bring in elasticity of demand or supply when both curves
shift in this instance.

Students’ answers: 6+1

Since rapeseed oil is consumed at a large scale in the region for the production of
biodiesel such as EU, rapeseed is thus a material needed for production of
biofuels. When Europe’s biofuel industry continues to grow, the demand for biofuel
increases. Hence, rapeseed’s demand also increases as it is a derived demand for
biofuel. When rapeseed’s demand increases from D0 to D1, the demand curve also
shifts rightwards from D0 to D1. This causes the price of rapeseed to increase
while quantity of rapeseed also increases.
Price of rapeseed

D1
D0
P1

P0
S1
S0 Quantity of rapeseed
Q1 Q0

Market for rapeseed

When there is a poor harvest of rapeseed, the supply of rapeseed falls. This causes
the supply curve of rapeseed to shift leftwards from S0 to S1. Thus the prices of
rapeseed increases while the quantity of rapeseed decreases.
Due to the combination of Europe’s growing biofuel industry and poor harvest, this
has caused an increase in demand of rapeseed and a decrease in supply of
 rapeseed available in the market. Hence, due to the simultaneous shift in demand
and supply curves, the equilibrium price of rapeseed in the market will definitely rise
from P0 to P1. However, since the increase in demand caused the quantity to
increase while the decrease in supply caused the quantity to fall due to the
simultaneous shift, the final equilibrium quantity is dependent on the extent of shifts
of both curves.
Since rapeseed is only one of the sources of biofuel, when demand for biofuel
increases, the rapeseed’s demand will also increase but the extent of shift will not be
as large as the extent of shift in supply curve when there is poor harvest, since poor
harvest will greatly affect the extent of leftward shift in the supply curve. Hence, the
fall in supply is more than the increase in demand causing the final equilibrium to fall
from Q0 to Q1.

Suggested answer:
The market for rapeseed is determined by the interaction of demand and supply. Europe’s
growing biofuel industry has led to an increase in the derived demand for rapeseed as
rapeseed oil is a primary ingredient in the production of biofuels. Thus, demand for rapeseed
increases from DD0 to DD1 as seen in the diagram below. [2] This leads to a rise in
equilibrium price and quantity. Poor harvests caused by unfavourable weather condtions
have affected the supply of rapeseed and causes a fall in supply from SS0 to SS1. [2] This
leads to a rise in equilibrium price and a fall in equilibrium quantity.
Price SS1

P1 SS0

P0

DD1
DD0
0 Quantity of rapeseed
Q1 Q0

The combination of both factors will lead to a shortage as quantity demanded exceeds
quantity supplied. This causes consumers to bid up prices. As price rises, quantity
demanded falls while quantity supplied rises. This price adjustment process continues until
quantity demanded equals to quantity supplied at the new equilibrium price P2. Thus, there
is a mutually-reinforcing effect on the rise in equilibrium price of rapeseed from P0 to P1
while the effect on equilibrium quantity is uncertain and depends on the extent of shifts in
demand and supply. [1] Given that the harvest volume appears to have fallen drastically as
shown in table 2, the fall in supply might be more significant than the rise in demand, leading
to an overall fall in equilibrium quantity from Q0 to Q1. [1]

(d) Explain whether the change in the consumption of biofuel as shown in Table
1 might affect the PED of crude oil. [6]

Examiners’ Comments:
This question forces student to first identify the change in the consumption of biofuel as
shown in Table 1 which many did not do so. While many clearly defined Ped, there were
quite a handful who were careless in their definition. ‘ceteris paribus’ is missing in many
scripts. Though many were aware of the need to bring in the change in Ped, there were
many who were not specific in stating the change. Some instead give specific value of Ped
which is not required, while others gave answer such as Ped value moves from less than 1
 to more than 1 which technically is incorrect since it is still a commodity with few close
substitutes. ‘whether’ in the question requires students to give 2 sided answer and yet many
students did not do so.

Student’s answer - 4/6 marks (a one sided answer)

The change in biofuel causes the Ped of crude oil to be more elastic. Ped is the degree of
responsiveness of quantity demanded when there is a change in price of the same good,
ceteris paribus. (clear definition of Ped)
Biofuel is a close substitute to crude oil. (identify relationship between biofuel and crude
oil)This means that consumers can easily switch to biofuel if there was a rise in price of
crude oil. Therefore biofuel will cause the quantity demanded of crude oil to fall more than
proportionate if there was an increase in price, ceteris paribus. As there is an increasing
consumption of biofuel and decreasing consumption of crude oil,(using data) it tells us that
there is a lower reliance on crude oil in the market. As the reliance of crude oil falls,
consumers will switch to biofuel as an alternative. Therefore causing the demand for crude
oil to be more price elastic. (answering to question – what happen to Ped)

Suggested answer:
Price elasticity of demand (PED) is the degree of responsiveness of quantity demanded of
a good to a change in its price, ceteris paribus. The demand for crude oil is likely to be price
inelastic (PED < 1) as it is an important resource that has few close substitutes. With the
development of biofuel as an alternative source of energy, the PED of crude oil might
change. (2m)

Table 1 shows that biofuel consumption has been increasing from 2009 to 2014 while crude
oil consumption has been decreasing over the same period. This could indicate that firms
are increasingly able to replace crude oil with biofuel. This means that the biofuel could be
viewed as a viable alternative to crude oil, thereby making the demand for crude oil less
price inelastic. (2m)

However, the PED of crude oil might not change as Extract 3 states that biofuel might not
be a very good substitute for crude oil as it is not presently compatible with all vehicles.
Hence, biofuels might only be able to replace crude oil in certain cases, limiting the extent to
which the PED of crude oil will be affected. (2m)

Overall, the development of biofuel as an alternative energy source is likely to affect the PED
of crude oil by causing demand to be less price inelastic. However, given the issues
mentioned in Extract 3, the PED for crude oil is unlikely to change drastically in the short
term.

(e) Extracts 1 and 2 outline the effect of rising demand for biofuel on global food
prices. In view of this, discuss whether the EU government should continue
with the Renewable Energy Directive. [8]

Examiners’ Comments:
Amongst all questions, this was the most poorly attempted question. In general, answers
lack economic analysis and were very scattered – there is no clear economic
analysis/justification to why a government would continue or stop the RED. Most of the
students are also not aware that this question is a perspective taking question – where they
are to undertake the perspective of the EU government in making the decision on whether
they should continue with the RED. As such, most responses lack focus on how continuing
with the RED would impact the objectives of a government – Micro aims/ SOL. (Macro aims
are not applicable in this question/context as the extracts does not hint support/ applications
on the Macro aims)
Students should also read the extracts carefully and dissect the passage properly before
answering the questions. Several students misinterpreted the objective of RED and thus
gave strange and conflicting economic analysis on the cost/benefits of RED on the Micro
aims/ SOL.

Suggested answer:
The Renewable Energy Directive (RED) is a policy that has the intended consequence of
promoting the development of renewable energy sources through the setting of specific
energy targets (Extract 1). In considering whether to continue with the RED, the EU
government should consider the benefits, costs, constraints, as well as unintended
consequences.

Claim: The EU government should continue with the RED

Support:
The key benefit of continuing the RED is that more effort will be placed in the development
of renewable energy sources such as biofuels. This would aid in the decarbonisation of the
transport sector (Extract 2), producing less pollutants and hence increasing the non-material
standard of living of the population as they enjoy better air quality and health. Table 1 shows
that the RED has been successful in increasing the consumption of biofuel while reducing
the consumption of crude oil. This would allow for more sustainable growth, increasing the
standard of living of citizens. Hence, continuing the RED could allow this trend to continue.

Furthermore, by continuing the RED, it would encourage more private vehicles to switch
from the fuels derived from crude oil to biofuels. As biofuels are cleaner than fuels derived
from crude oil, this would reduce the carbon emission arising from usage of private vehicles.
Thus the MEC arising from vehicle usage would reduce, shifting MSC closer to MPC. This
would thus reduce the market failure as the new social optimal level of vehicle usage is now
closer to the original private equilibrium output level. Hence another benefit of RED would
be to help the EU government to achieve a more allocative efficient level of vehicle usage
and thus reducing market failure.

Question:
However, the EU government has to weigh these benefits with the costs of the RED –
subsidies for the research and development of renewable energy sources as well as the loss
of tax revenue through tax incentives given to farmers. This rise in government spending
and fall in tax revenue worsen the budget of EU government. Extracts 2 and 3 highlight
several other issues that have arisen due to the RED.

Firstly, the effectiveness of the RED in reducing market failure arising from vehicle usage is
constrained by hidden carbon emissions from indirect land-use change (Extract 2). As the
indirect land-use change would result in more carbon being emitted from the production of
biofuels, it might offset the decrease of carbon emission brought about from the switching of
fuels derived from crude oil. Thus, the overall carbon emission might not have lowered
despite the RED, and market failure continue to persist.

Secondly, the effectiveness is constrained by the fact that biofuels are not fully compatibility
with all types of vehicles (Extract 3), it thus suggests that not many vehicles can switch to
biofuels easily and whether vehicles would eventually emit less carbon would depend on
whether the car manufacturer are willing to develop biofuel compatible vehicles in the near
future. Thus, the effectiveness of RED in reducing carbon emission in transport market is
questionable as availability of biofuels is not the only factor that can reduce carbon emission.
In this case, it also necessitates the cooperation of car manufacturers to develop biofuel
compatible vehicles in order to achieve a lower carbon emission in the transport market.

Moreover, the EU government also has to consider the unintended consequences of the
RED. Extracts 1 and 2 state that the increased demand for biofuel crops (such as palm and
 rapeseed) have led to an increase in food prices. This is because biofuel crops and food
crops are in competitive supply. Both types of goods use the same factors of production –
land. A rise in production of biofuel crops arising from the rising profits attain in selling of
biofuel crops would meant that farmers would allocate more land to planting of biofuel crops
and less land to the planting of food crops. As such, there would be a fall in supply of food
crops which thus increase the price of food crops. This could have drastic effects on the cost
of living as food is a basic necessity in all societies. Poorer households would be worse off
as they would have to allocate a larger proportion of their income on food and less on other
goods and services. Thus may thus worsen equity in the economy.

Evaluative Conclusion:
If the EU government is able to promptly address the issues raised above in terms of
reducing the constraints and unintended consequences, and that benefits outweigh costs, it
should continue with the RED has this would allow the region to continue its decarbonisation
in order to achieve better air quality and higher standard of living for the people. To overcome
the constraints, the EU government would need collect more accurate information on the
amount of hidden carbon emissions and the extent of the incompatibility issue in order to
make a better assessment of the situation, as well as replace certain engine components to
make vehicles compatible (Extract 3). To reduce the unintended consequence of rising
inequity from the rising prices of food crops, the EU government can provide subsidies to
help lower-income consumers cope with the rising cost of living, or directly subsidise farmers
to grow food crops.

Marking Scheme
Level Descriptor Marks
L2 Explains clearly using case evidence the considerations of 4-6
the EU government.

L1 Merely stating the benefits or costs of the RED. 1-3

E Explained evaluative comment that focuses on why the EU Up to 2 marks

government should or should not continue the RED.

(f) (i) Explain how the production of rapeseed can cause market failure. [6]

Examiners’ Comments:
A question which is done well by most candidates. Most candidates were aware of
the 7 steps to explain market failure. The only problem is the inability to explain 3 rd
party and 3rd party cost from rapeseed production. A handful link it to increase
pollution from increase land use for biofuel cultivation (which is not the case here) to
the harm to human bodies due to the consumption of contaminated food crops (which
is not in the extract). A handful instead explain imperfect information and positive
externalities. In addition, many students started their answer by first defining market
failure followed by meaning of negative externalities without explaining that causes
of market failure is due to presence of negative externalities. Many also did not state
the divergence between PMC and SMC occurs at equilibrium ouput.

Students’ answers: 5/6 marks

Market failure occurs when the free market fails to achieve efficiency. Negative
externalities are cost borne by third parties who are not involved in the consumption
and production of rapeseed. (did not explain what causes market to fail and
incomplete definition of negative externality)
The private marginal benefit is the profit producers earn when they produce and sell
rapeseed. The marginal private cost of the production of rapeseed is the cost of
production of rapeseed. Negative externalities, such as increase in carbon emission
due to the reclaimation of carbon-rich land to make way to grow rapeseed, might
impose health problem to third parties causing them to incur heathcare costs. (this
is not an external cost from rapeseed production). The presence of negative
externalities cause a divergence between the PMC and SMC. (not explaining
where is this occurring). Assuming there are not positive externalities, SMB=PMB
Society welfare is maximised at SMB = SMC at Qs. However, the output of
rapeseed is at Qe, where PMC=PMB where private firms maximise their profit. For
Qe>Qs, SMC>SMB for every additional quantity of rapeseed supplied, causing a
deadweight loss to society, represented by the shaded area. Therefore,
overproduction of rapeseed causes market failure due to the presence of negative
externality.

Suggested answer:
Market failure occurs when the free market fails to achieve efficiency. The production
of rapeseed leads to market failure due to the presence of negative externalities,
which are spillover costs affecting third parties who are not directly involved in the
production of the good and are not compensated.

Rapeseed producers are only concerned with their marginal private costs (MPC) and
marginal private benefit (MPB). In this case, MPC is the cost of producing one
additional unit of rapeseed, for instance the cost of operating the machinery or labour
costs. MPB is the additional revenue earned from producing the unit of rapeseed.
Negative externalities arise as producers (farmers of rapeseed) use neonicotinoid
pesticides in order to attain high yields. This harms the bee population and could
affect global agricultural production, eventually leading to higher food prices for the
consumers (third parties). These marginal external costs (MEC) cause a divergence
between marginal social cost (MSC) and MPC by a distance of MEC since MSC =
MPC + MEC. Assuming no positive externalities, marginal external benefit (MEB)
equals to zero hence MPB equals to marginal social benefit (MSB).
Price /cost/benefit
MSC

MEC
MPC

MPB = MSB

0 Quantity of rapeseed
Qs Qp

If left to the free market, producers will produce up to quantity Qp where MPB equates
MPC in order to maximise their profits. The socially optimal level occurs when the
additional cost to society is equal to the additional benefit to society, where MSC =
MSB for the last unit of rapeseed produced at Qs. Since Qp is greater than Qs, there
is an over-production of rapeseed in the free market. For every additional unit of
rapeseed produced between Qp and Qs, MSC > MSB, causing a deadweight loss to
society represented by the shaded area.

Thus, the existence of negative externalities in the production of rapeseed leads to

over-production and market failure, resulting in welfare loss and economic
inefficiency.
 Marking Scheme
Identify that rapeseed production generates negative externalities and clarify what is
MPC and MPB of producing rapeseed (2m)
Identify 3rd parties and explain the external costs (2m)
Mention of divergence between MPB and MSB and Qs>Qp leading to over-
production and deadweight loss between Qp and Qs (2m)

Marking Scheme
Level Descriptor Marks
L2 Accurate analysis of how over-production of rapeseed leads 4-6
to market failure.

L1 Weak analysis of how over-production of rapeseed leads to 1-3

market failure.

(f) (ii) With reference to case material and/or your own knowledge, discuss
whether a complete ban on the use of neonicotinoid pesticides is the
best way to address the problems arising from production of rapeseed. [12]

Examiners’ Comments:
This question was poorly attempted. The most common misconception was to state that a
ban on the use of neonicotinoid pesticides would lead to quantity of rapeseed produced
being zero. It is crucial to note that the socially optimal level of rapeseed production is not
zero. Many candidates simply regurgitated material from their lecture notes without any
application to the context. There were also a number of students who addressed the question
in the wrong context, explaining the market for pesticides instead of rapeseed. It is important
for candidates to take reference from the wording of the question – “problems arising from
the production of rapeseed”.

A small minority of candidates were able to correctly identify that a ban on the use of
neonicotinoid pesticides would force producers to use other (costlier or less effective)
pesticides, thereby raising their PMC. Others were able to accurately state that the cessation
in use of these pesticides who reduce or remove the deadweight loss, shifting SMC closer
to PMC. Better candidates make comparison to other policies such as a tax, regulations on
the use of neonicotinoid pesticides, or research into alternatives.

While many candidates attempted to conclude by making a judgement, the quality of these
conclusions was poor. Some simply stated that a combination of policies was needed,
even though it is not logical (or possible) to combine a ban with a tax. Some also brought in
policies such as nationalisation, even though such policies are highly unrealistic and are
unlikely to be feasible.

Students’ answer (L3-9, E-1):

The complete ban on the use of neonicotinoid pesticides would cause the farmers to be
unable to use neonicotinoid pesticides, will cause the extent of EMC to decrease as the
damage to bees by the neonicotinoid pesticides is reduced. This would cause EMC to be
reduced to EMC2 as shown in the diagram. This would cause the divergence between SMC
and PMC to be reduced to SMC2 and PMC. This would also cause the new socially optimal
level to be at Qs2 which is closer to Qe. The deadweight loss to society would also be
reduced as shown in the diagram from area ABE to area CDE. (note: area was shown
incorrectly). This would reduce the negative externalities of production and reduce market
failure.

The benefits of a complete ban on the use of neonicotinoid pesticides is that it is fast and
inexpensive way to reduce negative externalities. However, the limitation is that enforcement
is required to ensure the absence of use of neonicotinoid pesticides and this would cause
the government to have to pay additional administrative cost.

Another policy that could be used to address the problems arising from production of
rapeseed could be taxation. By imposing a tax of value equal to EMC, this would cause the
cost of production of rapeseed to increase. This would result in a shift in PMC curve from
PMC to PMC2 which coincides with SMC as shown below. This would cause equilibrium
quantity of rapeseed produced to shift from Qe to Q2 which coincides with Qs, the socially
optimal level, reducing the deadweight loss and eliminating deadweight loss.

The benefits of taxation is that it can be adjusted up and down easily whenever the
government feel like the equilibrium quantity of rapeseed produced is not at the socially
optimal level. However, the limitation of taxation is that the government might overtax and
cause the deadweight loss to be greater than before as shown below. This would not only
not eliminate market failure, but worsen the situation.

In conclusion, the complete ban on the use of neonicotinoid pesticides may not be the best
way to address problems arising from the production of rapeseed. A better solution would
be a combination of completely ban on the use of neonicotinoid pesticides as well as taxation
as the tax revenue earned could be used for the administrative cost from the enforcement of
the complete ban on the use of neonicotinoid pesticides.

Comments: Largely accurate analysis on how the ban and tax work to achieve a more
efficient allocation of resources. Some minor gaps. Weak evaluation that does not justify the
stand made.

Suggested answer:
Extract 7 states that a complete ban on the use of neonicotinoid pesticides might be needed
to correct the market failure caused by negative externalities. Whether this is indeed the best
way to address the problems will depend on the feasibility and effectiveness of the policy,
as well as whether it targets the root cause of the issue.

Claim: A complete ban on the use of neonicotinoid pesticides is the best way to
address the problems arising from production of rapeseed

Support:
A complete ban on the use of neonicotinoid pesticides will force farmers of rapeseed to find
other ways to attain high yields. This change in the method of production to other forms of
pesticides would cause less harm to the bee population and hence MEC would be reduced.
If the new method of production does not
cause any harm to the bee population,
MEC would be reduced to zero. At the
same time, it is likely that these alternative
methods of production would be costlier
than using neonicotinoid pesticides,
thereby raising the MPC of producers.
The combination of higher MPC and lower
MEC would mean that the new socially
optimal level of Qs2. This reduces the
deadweight loss in the market and
addresses the market failure.

rapeseed
Question 1: Complete ban might not be effective or feasible
However, a complete ban requires effective monitoring and enforcement. If the fines
imposed are not substantial (constraint), producers might continue to use neonicotinoid
pesticides and attempt to evade the authorities. This would render the policy ineffective.
Furthermore, it might be difficult to enforce a complete ban as it is constrained by the large
size of the EU and the spread of producers across the region. It might be extremely costly
(cost) for the government to enforce such a policy.

Question 2: A tax might be more effective

Given these limitations, a complete ban might not be the best policy. Instead, the EU
government might consider using a tax on the use of neonicotinoid pesticides. A tax could
be imposed on producers of rapeseed such that they would have to pay the government for
the use of neonicotinoid pesticides. The tax per unit should be equal to the MEC and it would
raise the cost of production, forcing them to internalise the external cost and face a higher
MPC as shown below. MPC curve shifts leftwards to MSC curve. Producers would reduce
production from Qp to Qs which is also the socially optimal level of rapeseed production.

Because the tax is a price measure, the price mechanism continues to function in the market.
Farmers that can adopt alternative and less harmful methods to attain high yields of
rapeseed most cheaply would switch methods, especially if it is cheaper than paying for the
tax. However, it may be difficult for the government to quantify the MEC and charge an
appropriate tax as it is constrained by the lack of information. Over-taxation could lead to
under production and a greater deadweight loss and worsen the situation.

Question 3: Research into alternative methods of production of biofuel might be a

better policy
Finally, the government could also consider investing in research and development to either
find alternative ways of producing biofuels (without the use of rapeseed) or new pesticides
that can help farmers attain similarly high yields without harming the bee populations. With
new methods of production, the MEC would be reduced, thus shifting the MSC nearer to
MPC and hence reducing the extent of market failure. This approach would target the root
cause of the issue – that the use of neonicotinoid pesticides is harming insect life. However,
they are likely to be very expensive and might require large amounts of government spending
(cost). Such costly R&D incurs opportunity cost in terms of forgone spending in other areas
of the economy such as healthcare and education, which may hinder potential growth in the
long run as an unintended consequence. There is also no guarantee of success as such
research is unpredictable and usually takes a long time, hence the effectiveness is
constrained by time.
Evaluative Conclusion:
Given the situation that the EU government is in, a complete ban is unlikely to be the best
solution due to the difficulty in enforcing and monitoring (constraint) it as well as its inability
to tackle the root cause (ineffectiveness) of the issue, hence the costs seem to outweigh the
benefits. It might be more feasible and for the government to implement taxation to force
firms to be accountable for the use of neonicotinoid pesticides while also using the tax
revenue to invest in research and development to find alternative ways to produce biofuels
without the use of rapeseed, which tackles the root cause of the problem. The tax would be
effective in the short run and can be used to finance new methods of production and allow
time for R&D to be effective in the long run.

Marking Scheme
Level Descriptor Marks
L3 Strong analysis of how a complete ban works to address the 6-9
problems and compares it with other policies.

L2 Some analysis of how a complete ban works to address the 3-5

problems and some comparison with other policies.

L1 Weak and largely theoretical answer. 1-2

E Well-reasoned conclusion for why a complete ban is or is not Up to 3 marks

the best policy approach.