Suggested Answers to A Level 2020 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit

Question 2
Concerns about future shortages of water resulted in Singapore’s national water agency, PUB, increasing the price
of water by 30% from 2017. By 2060, Singapore’s total water demand could almost double.

(a) Explain why a shortage of water might still exist after the rise in the price of water. [10]

(b) Discuss whether the government policy of increasing the price of water is the only effective way to overcome
future water shortages. [15]

Part (a)

Introduction
The price mechanism helps achieve allocative efficiency by adjusting to resolve situations of disequilibrium, i.e. shortages
and surpluses. Shortages are resolved by price increases, which is what PUB has done in an attempt to resolve/prevent
water shortages. This essay shall explain how the price mechanism works to resolve a water shortage and elaborate on 2
possible reasons why the price increase might be insufficient.

Body

An increase in the price of water is supposed to solve water shortages via the price mechanism (also known as price
adjustment process). A water shortage can be represented as a disequilibrium in Fig 1, where Qd exceeds Qs at P0. As
such, increasing the price of water is a way to manage the disequilibrium. With an increase in price of water from P0 towards
the market price, Pe, the quantity demanded would fall as seen from Qd to Qe, and the quantity supplied would increase
from Qs to Qe, arriving at the equilibrium where quantity demanded equals quantity supplied at Qe, hence, there will no
longer be a water supply shortage

R1: Increase in price is insufficient to eliminate shortage

Fig. 1 Market for water

There are 2 possible reasons why a water shortage might still exist after the price increase. Reason one would be that the
increase in price by 30% is inadequate and does not reach Pe. From Fig 1, if the price increase is insufficient (from P0 to
P1), a shortage of water supply still exists. (Qd1 – Qs1). There are equity and political concerns with regards to the price
increase of a necessity such as water, and thus the government may not opt to increase the price high enough to reach the
equilibrium price. (Another similar reason is that the government gauged the required price increase wrongly and
underestimated the increase needed to reach Pe).
 Suggested Answers to A Level 2020 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit

R2: Demand is not static but continues to increase over time

Fig. 2 Market for water

The other reason is that after the price increase has remedied the shortage, demand continues to increase, resulting in a
higher market price. This is likely to occur as Singapore’s population is still increasing (demographics) and the rise of high-
end manufacturing will increase the demand for more water as it is essential in many processes.

From Fig 2, even though the price increase from P0 to Pe would have solved the original shortage, an increase in demand
for water from DD to DD1 means that there is still a shortage of water present (Qd1 – Qe). Hence, a shortage still exists,
although it has been reduced by the price increase. To solve the water shortage, the price must be increased to the higher
price of Pe1.

The above 2 reasons explain why the price increase might be insufficient, nevertheless the suggested price increase is a
good way for Singapore to reduce the likelihood or severity of any potential future water shortage.

(Optional reason: One more reason, which is unlikely but possible given climate change, is that weather conditions cause
Malaysia and Singapore’s reservoirs to dry up, causing a big negative supply shock. Even though we have quite a few
desalination plants, it is very possible that their production is inadequate in making up for the supply shock. This will cause
the supply curve to shift left and create a shortage at the prevailing equilibrium price.)

Level Descriptors Marks

L3
● Breadth & Application
8-10
o Covers two requirements in the form of two different explanations on why shortage can
remain even after price increase.
o Analyses entire scope as suggested by the question or/& preamble

● Depth
o Applies relevant economic concepts or theories (explanation of shortage and price
adjustment is important)
o Explains with rigour and detail
o Explains and illustrates with relevant diagrams and examples – Price Mechanism
diagram showing disequilibrium
 Suggested Answers to A Level 2020 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit

L2
● Lacking in any one of the L3 criterions
5-7

L1
● Largely irrelevant response
1-4

● Descriptive response with non-existent or minimal or application of economic concepts or

theories
● Serious and pervasive conceptual errors

Part (b)

Introduction
As mentioned in part a, increasing the price of water works to alleviate the shortage via the price mechanism. However, we
can also alleviate the shortage by manipulating demand and supply shifts. This essay will explain how we can control
demand and increase supply of water to alleviate the shortage, while also elaborating on the respective limitations.

(Note: this is an older question that does not lend neatly to the R1/R2 requirements format. Rightfully, R1 for this
question should be about the effectiveness of allowing price to increase to address shortage, but if so, it would be
very short as this should already be covered in part a. Yet the increase in price as a means to address shortage
must not be left out in part b given the phrasing of the question.)

Body

R1: Use moral suasion to slow the increase in demand

Singapore can slow the increase in demand for water. As mentioned in the previous essay, increasing prices lead to a
reduction in quantity demanded while leading to an increase in quantity supplied, thus alleviating the shortage. An additional
and indirect intention is to signal the importance of not wasting water, changing consumers preference to be more mindful
and thus slowing the increase in demand. The government uses other forms of moral suasion to slow the increase in
demand. Examples include the 5-minute bath campaign, encouraging families to use water from the washing machine to
mop the floor or flush the toilet. The government could also promote the adoption of water conservation technologies via
subsidies.

EV1: However, these measures are likely to be very limited in reducing increase in demand for water considering the fact
that a large proportion of water is used industrially and is projected to increase sharply1. Other aspects of demand like
demographics, income and economic activity will also increase demand for water. Hence the impact of moral suasion may
be minimal.

1
https://www.pub.gov.sg/watersupply/singaporewaterstory
 Suggested Answers to A Level 2020 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit

R2: Invest in water technologies

Fig. 3 increase in supply of water

Another policy is to continue investing in water technologies. Given so many threats to Singapore’s water supply, we cannot
let up when it comes to this. In a bid to increase the supply of water, we have invested heavily into technologies like
desalination and NEWater. Even more advanced technologies like atmospheric water generators, where water is extracted
from humid ambient air, should be explored. By doing so, we can increase the supply of water from SS0 to SS1 in Figure
3. Hence ceteris paribus, without increasing the price of water from P0 to P1, we are able to correct the water shortage
present (Q2 – Q0), increasing quantity exchanged to Q2 and keeping the price at P0.

EV2: However, these new technologies are likely to be costly in both development and maintenance which must be paid
for by taxpayers, both directly and indirectly. This is likely to incur opportunity costs for the government. The uncertainty of
success creates the possibility of large amounts of tax-payer’s money spent without a corresponding return in terms of water
production. This will be politically inexpedient for the ruling government and thus they will have to exercise prudence in
investing in new technologies.

Even as we do all the above, we must continue to maintain good relationships with our current supplier of water, Malaysia.
As long as it does not compromise our interests, we should continue to be good neighbours, e.g., selling them treated water
at a discounted rate. However, given the uncertainty in political succession and foreign policy of Malaysia, it is difficult to
ensure that imported water supply from Malaysia is always reliable.

Conclusion

In the short run, a price increase will be somewhat effective, but equity will be affected as the lower income will be affected
disproportionately. The government mitigates this by providing rebates for low wage earners, but this is not a long-term
solution. Demand will continue to increase as our population and economy grows and continued increase in water prices
will create further cost of living pressure on the low income, even with rebates. The most important long run policy, therefore,
is continual investment in water technologies. The government has built up expertise over the years in water technologies
and has enough expert personnel to properly estimate the success rate of various technologies and invest accordingly. This
will increase supply of water at a rate which should match the increase in demand. This allows the price of water to stabilize,
alleviating the cost-of-living pressure on the low income and while preventing water shortages.
 Suggested Answers to A Level 2020 H2 Economics (ESSAYS) by Hwa Chong Institution Economics Unit

Level Descriptors Marks

L3
● Breadth & Application
8-10
o Covers 2 requirements on two strategies to reduce water shortage besides allowing
price to increase
o Analyses with the expected theoretical scope (e.g. price mechanism, demand and supply
analysis)
o Analyses entire scope as suggested by the question or/& preamble

● Depth
o Applies relevant economic concepts or theories
o Explains with rigour and detail
o Explains and illustrates with relevant diagrams and examples – Demand and Supply
diagram with shift

L2
● Lacking in any one of the L3 criterions
5-7

L1
● Largely irrelevant response
1-4

● Descriptive response with non-existent or minimal or application of economic concepts or

theories
● Serious and pervasive conceptual errors

Evaluation

E3
● Takes a clear overall stand that is comprehensively justified by providing convincing
4-5
evaluative comments on the relative importance of most of the points covered in the body

E2
● Takes a clear overall stand which is only partially justified as
2-3
o Only some of the points mentioned in the body were evaluated
o The overall stand was largely justified by the inclusion of additional concluding points
to sway the overall argument
o The arguments used to evaluate individuals points were unconvincing or somewhat
flawed

● Evaluates at least one of the points covered in the body but the overall stand is unclear

● Provides insightful opinion(s) which are however not directly relevant to the requirements of
the question

E1
● Provides unsubstantiated opinion(s)
+1

Note: An opinion is NOT a STATEMENT (Tips: Use normative words: best, more, less, large/small
extent)