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GCE JAN 2008 : (AS 1) The Market Mechanism, Market Failure and Government Response

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ADVANCED SUBSIDIARY (AS) General Certificate of Education 2008 Economics assessing Module 1: The Market Mechanism, Market Failure and Government Response ASE11 Assessment Unit AS 1 (Data Response) [ASE11] THURSDAY 17 JANUARY, MORNING TIME 45 minutes. INSTRUCTIONS TO CANDIDATES Write your Centre Number and Candidate Number on the Answer Booklet provided. Answer all five questions. INFORMATION FOR CANDIDATES The total mark for this paper is 40. Quality of written communication will be assessed in questions 1, 2, 4 and 5. Figures in brackets printed down the right-hand side of pages indicate the marks awarded to each question or part question. ADVICE TO CANDIDATES You are advised to take account of the marks for each part question in allocating the available examination time. ASE1W8 3845 Study the information below and answer the questions which follow. What price carbon? Source: www.stuffintheair.com (Paragraph 1) Most economists argue that when an individual s decisions damage the interests of others then that damage should be reflected in the price paid by the decision-maker. Markets will fail to deliver welfare-maximising outcomes when production generates significant external costs. The emission of the greenhouse gases which cause climate change is a clear example of economic activity creating a negative externality and hence causing market failure. (Paragraph 2) Some negative externalities can easily be solved through direct bargaining and compensation between those who cause and those who suffer from the negative externality. So if your neighbour wished to have a rather noisy party then you might be persuaded to tolerate the inconvenience by being bought a bottle of wine or perhaps receiving an invitation to the party. (Paragraph 3) Obviously climate change does not fall into this category. There are too many producers of greenhouse gas emissions and climate change affects us all to a greater or lesser extent, making such direct bargaining impractical. (Paragraph 4) Solving this problem is therefore the responsibility of government which can try to reduce emissions in various ways such as regulation, taxation and pricing the greenhouse gases which cause the damage. None of these options is without its disadvantages. (Paragraph 5) Regulation, such as forcing energy companies to produce a certain proportion of the fuel they sell from renewable sources, involves government in allocating resources. Markets are generally better at this than politicians or bureaucrats, not to mention the considerable costs of enforcement. ASE1W8 3845 2 (Paragraph 6) Taxation such as the recently introduced air travel tax is a blunt instrument which applies equally to all airlines, irrespective of how much greenhouse gas they generate. Easyjet which claims to emit 30% less carbon per passenger/kilometre than traditional airlines feels particularly aggrieved at this measure. Chief Executive Andy Harrison stated, We believe that a much better way to balance aviation s social and economic benefits with its contribution to climate change is to bring it into the EU s emissions trading scheme . (Paragraph 7) This scheme aims to price the greenhouse gases in line with the damage they do. Economic theory indicates that this is the best solution since the market price of production will now fully reflect all of its costs. (Paragraph 8) However, fine though the principle is, it also has been mishandled by governments which have handed out too many allowances so that the market price of emitting a tonne of carbon has fallen from 34 Euros a year ago to a mere 1.2 Euros today (March 2007) far too low to induce anyone to constrain their emissions. (Paragraph 9) It is clear that policy-makers have a long way to go in formulating a coherent response to climate change. Adapted from the Economist March 17th 2007 Answer all five questions. 1 Explain why private negotiations cannot solve the problem of greenhouse gas emissions. [6] 2 Using the information in paragraph 8, and with the assistance of an appropriate diagram, explain why the price of emitting a tonne of carbon has fallen. [6] 3 (a) Explain what is meant by a public good. [2] (b) Explain why the prevention of man-made climate change may be viewed as a public good. [4] 4 With the assistance of an appropriate diagram, explain how free markets fail when the production of a good creates negative externalities. ASE1W8 3845 3 [10] [Turn over 5 Write a short report, including a reasoned conclusion, to the government outlining the relative merits of dealing with climate change by: (i) regulation (ii) taxation (iii) tradeable greenhouse gas permits. Permission to reproduce all copyright material has been applied for. In some cases, efforts to contact copyright holders may have been unsuccessful and CCEA will be happy to rectify any omissions of acknowledgement in future if notified. SP (SC) T55872/3 [12]

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Additional Info : Gce Economics January 2008 Assessment Unit AS 1 Module 1: The Market Mechanism, Market Failure and Government Response
Tags : General Certificate of Education, A Level and AS Level, uk, council for the curriculum examinations and assessment, gce exam papers, gce a level and as level exam papers , gce past questions and answer, gce past question papers, ccea gce past papers, gce ccea past papers

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