Cambridge A Level Economics 9708 — 2018 Oct/Nov Paper 4 · Variant 1

1 Sustainable electricity The UK government favoured the production of cheap, sustainable electricity and subsidised the large companies that operate wind farms. The wind farms cost a lot to build and maintain. However, as the wind is free, the companies pay nothing for fuel and can sell electricity at very low prices – when the wind is blowing. This destroys any incentive to build power stations that combine the use of wind and gas because when the wind blows the gas unit is switched off and the return on the investment in gas is zero or negative. This has meant that the gradual replacement of coal-fired power by more efficient gas-fired power is not progressing and, as a result, there is no significant cut in carbon dioxide emissions. Prices charged for electricity not produced by wind farms have been rising because government support for the electricity industry has been directed to the wind farms. Expensive electricity production has driven industries abroad which has resulted in a loss of income and jobs. By 2020 it is estimated that small businesses will be paying 77% more per unit for electricity. The poor and the elderly have been hit hardest by high electricity bills. Some say that the support of wind farms has caused the destruction of landscapes. Source: The Times, 9 November 2015 Sustainable agriculture In Africa, industrial methods of agriculture deplete the soil, pollute water tables and fail to benefit small-scale farmers. Agro-ecological methods – aimed at producing food without damaging natural resources – are by contrast more sustainable for the farmers and more nutritious for consumers. Advocates say these methods are profitable for small-scale farmers and more productive with high yields and cheap inputs. They say ‘we need to develop local markets, create local diversity and increase the capacity of local economies’. Using them could have a huge effect on the 70% of Africans that rely on agriculture for their livelihoods. This was endorsed by a conference in Mali in 2015. Even large commercial farms are starting to adopt the agro-ecological methods. Currently, six companies supply 60% of the world’s commercial seed market and 11 companies supply 98% of the world’s pesticide market. Supporters of agro-ecological methods claim that these huge multinationals can easily capture markets through their combined financial and political power and can restrict farmers’ choice of what inputs to buy and which markets to supply. Those representing small farmers say that these markets are not competitive. Large corporations deny this accusation that they restrict markets and exploit small-scale farmers. They say farmers have to make a new choice each year so whenever input suppliers have a new product they need to offer something that is reliable so that the customers will come back and buy more. Source: African Business, August/September 2015 (a) Identify, from the article, three problems the UK faces in the production of electricity. [3] (b) Explain what is meant by equity and consider whether, according to the article, the subsidising of wind-power electricity production is likely to be equitable. [6] (c) The article says that the African agricultural markets are not competitive. Explain what is meant by a competitive market and comment on whether you agree with the judgement. [5] (d) Discuss whether there is evidence in the article that might lead you to conclude that large businesses are detrimental to an economy. [6]

Mark scheme: Question Answer Marks 1(a) 1 mark × 3 for: 3 • production of electricity by wind-power is cheap, but the cost of building the power stations is high • production is erratic and depends on the wind. • effect on environment • price rises • effect on employment • subsidies are preventing investment in alternative efficient gas-powered production resulting in continued use of old power stations 1(b) • equitable means fair (1 mark) 6 • Article says elderly and poor have to pay for subsidies. Disproportionately hit hardest (2 marks) • small companies have to pay towards subsidies while large companies receive subsidies (1 mark) • there is detrimental effects on the landscape (1 mark) • article does not provide evidence for equity (1 mark) 1(c) • Market has ease of entry, prices determined by demand and supply (2 5 marks) • There are small farmers (70% of population rely on agriculture) which might indicate a free market but there is counteracting evidence that large multinationals control seeds, grain and pesticides and their political power can restrict supply and control the market and that it is not free. Not enough information to make overall conclusion of the strength of each side. (3 marks) 1(d) • Agriculture – large businesses can control the market and put pressure on 6 small farmers to buy inputs. Industrial methods pollute the soil, damage water tables (3 marks) • Wind-power – large companies are subsidised, make profits – on an insecure supply; jobs lost, landscape changed, no reduction in carbon emissions. Energy-intensive industries driven abroad because of high operating costs (3 marks) Up to 4 for one side only

More questions on Different market structures

2 ‘A society that cares about efficiency needs to provide government funds for social sciences that work on the assumption that efficiency matters’. (Royal Society of Arts Journal, Issue 4, 2013) Explain what is meant by economic efficiency. Consider whether you agree that the only way to achieve economic efficiency is through public sector intervention in the economy. [25]

Mark scheme: 2 Explanation of meaning of efficiency and explanation of the analysis which ensures 25 an efficient optimum may be reached. Productive efficiency makes the best use of resources, and allocative efficiency ensures that no one can be made better off without someone being worse off. Individual actions are not always best for society as a whole. Discussion of reasons for market failure and necessity/desirability of government intervention to achieve efficiency. This could be by persuasion (nudge theory) rather than by enforcement. Nudge theory, originally an ethical idea not a government manipulative tool, involves designing choices to encourage decision making in wider positive interests of society. But it can be used in government context. Government intervention may thus be necessary, but it need not overcome inefficiency as there may be inefficiency in government through lack of information. L4 (18–25 marks): for a thorough explanation dealing with productive and allocative efficiency and a comment on the importance of both concepts; and an accurate discussion of market failure, with examples and a conclusion about the need for government intervention and whether such intervention is a sufficient solution. L3 (14–17 marks): for a competent but less developed explanation of the terms with accurate but limited comment on the importance. Also for a more limited discussion of the reasons for market failure and the need for government but without a comment on whether such intervention is sufficient to overcome market failure. L2 (10–13 marks): for a correct but brief explanation with some attempt at analysis possibly with only one type of efficiency correctly elaborated, no comment on importance; and for a brief analysis of market failure with few examples and no conclusion about necessity of government intervention. L1 (1–9 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Efficiency and market failure

3 (a) Explain what is meant by consumer equilibrium and consider whether the assumptions underlying consumer equilibrium are realistic. [12] (b) Analyse the differences between a normal good, an inferior good and a Giffen good. Discuss whether knowledge of these differences is all that is required by a company considering changing the price of its product. [13]

Mark scheme: 3(a) Equilibrium is a relation between the marginal utility and the price. Can be 12 explained using either marginal utility or indifference curves – marginal rate of substitution equal to the price ratio. Consideration of the assumptions rationality, sovereignty, the ability to measure utility, the relation between utility and price. L4 (9–12 marks): for a clear explanation and a sound comment on the relation between the price and the satisfaction obtained, referring to more than one good. Clear comment on the assumptions. L3 (7–8 marks): for a less developed answer but which still refers to the equilibrium but probably concentrates on only one good. Weaker consideration of the assumptions. L2 (5–6 marks): for a brief attempt which does not clearly bring out the significance of the marginal analysis or which does not deal with any of the assumptions. L1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory. 3(b). Analysis of the difference between income and substitution effects and the overall 13 effect on demand of a change in price. Whether demand will increase, and by how much for a price fall depends on the classification of the good but also on the price elasticity of demand. The company would also need to know if it increased production how that would affect costs – and thus profits. L4 (9–13 marks): there are three aspects to the question: a clear explanation of the analysis – income, substitution; a comment on the effect on demand and a comment on the relation to revenue via elasticity. Good reasoned structure. L3 (7–8 marks): for a less developed analysis of the income substitution effects, or of the link to demand, or a weaker link to the revenue. Two aspects done reasonable well, or three less developed. L2 (5–6 marks): for an answer that either deals with one aspect well, or two with less clarity. L1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Price elasticity, income elasticity and cross elasticity of demand

4 (a) Explain the economic theory of wage determination in perfectly competitive labour markets. [12] (b) In 2016, a union representing doctors organised strikes to oppose new contracts and rates of pay that were proposed by the government. Hospital appointments were cancelled. The government agreed to change some of the proposals. Does this statement prove that in imperfect labour markets wages are determined solely by trade unions and not by economic principles? [13]

Mark scheme: 4(a) Theory predicts certain outcome based upon the demand (mrp) and cost/supply of 12 labour. Explanation of determination of equilibrium output is required. L4 (9–12 marks): for a clear explanation of the theory and derivation of equilibrium position, a comment about possible changes in mrp or supply. MRP necessary for L4. L3 (7–8 marks): for a briefer explanation of the theory without any comment on possible changes or with a briefer explanation of the determination of the equilibrium. L2 (5–6 marks): for a much less developed answer with no elaborative comment and a vague – or non-existent – mention about equilibrium. L1 (1–4 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant. 4(b) The analysis of imperfect competition should be explained; the final wage can be 13 incorporated in the theory depending on the strengths of both sides in the bargaining process where there is monopsony. In the case of the doctors the TU did have some influence and the final wage was a compromise. This can be recognised by the theory and is not contradictory to it. L4 (9–13 marks): for a reasoned and clear explanation with accurate development of theoretical difficulties and a recognition that the final wage can be incorporated in the theory. L3 (7–8 marks): for a clear but undeveloped explanation of the imperfectly competitive market but without an explicit comment on the case in the question. L2 (5–6 marks): for a limited and not clearly presented attempt to consider the theory and with a greater concentration on the descriptive elements and with no link to the case in the question. L1 (1–4 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.

More questions on Labour market forces and government intervention

5 Recession in some economies has caused high unemployment. At the same time high levels of national debt and substantial budget deficits have been experienced. This means that governments can no longer use Keynesian demand management policies to solve the problem of unemployment. To what extent do you agree with this conclusion? [25]

Mark scheme: 5 Responses should provide a clear explanation of what economists mean by 25 recession with the emphasis on low growth rates, deflation and rising unemployment. The link between recession and national debt and budget deficits should also be discussed. Analysis should then be used to explain how Keynesian demand management policies are supposed to work. An attempt should then be made to evaluate the extent to which Keynesian policies might be effective under the conditions described. L4 (18–25 marks): for an answer that examines why Keynesian policies might not be effective. This should include traditional criticisms of such policies, for example Crowding Out and possible problems relating to balance of payments deficits. Also it is expected that discussion will make the link between existing high levels of national debt and that this problem would be made worse by continuing to allow substantial budget deficits. Alternative approaches might also be discussed and a conclusion provided. L3 (14–17 marks): for an analysis of how Keynesian solutions to the problem of high unemployment would operate in theory. This analysis would focus upon the use of budget deficits combined with a multiplier effect and how this might impact on the level of output and employment. L2 (10–13 marks): for an answer that describes the terms recession, budget deficits and national debt and makes some attempt to explain how Keynesian demand management policies are supposed to work. L1 (1–9 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Effectiveness of policy options to meet all macroeconomic objectives

6 (a) Examine the effects on the demand for money in an economy, when the money supply is increasing and more individuals are using credit and debit cards instead of cash to purchase goods and services. [12] (b) Quantitative easing will lead to lower interest rates and it will depreciate the value of the national currency. This will automatically lead to high levels of inflation. To what extent do you agree with this view? [13]

Mark scheme: 6(a) When the money supply is increasing then this would normally lead to a fall in 12 interest rates. This would not affect active balances based on the transactions/precautionary motives which are interest inelastic. A lower rate of interest would however affect the speculative demand for money which is influenced by an individual’s expectations of what is going to happen to the level of interest rates in the future. The overall effect on the speculative demand will depend upon the starting point when the money supply is increased. If interest rates are already very low the demand for money will increase significantly. The use of credit/debit cards will decrease both the transactions and precautionary demand for money. L4 (9–12 marks): for an answer that attempts to evaluate the relative importance of these changes in each case. Some attempt will also be made to discuss the extent of the impact by each change on each type of demand. L3 (7–8 marks): for an answer that analyses the effect of both these changes on each of the three motives for holding money. Answers should develop a logical argument to support their conclusion in each case. L2 (5–6 marks): for an answer that describes the possible effects of these changes on each type of money but does not provide any detailed comment or analysis. L1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory. 6(b) Quantitative Easing takes place when governments create money to purchase long 13 term securities from banks or the non-bank public. This will cause the price of bonds to rise and cause downward pressure on interest rates. Also due to a fall in interest rates plus negative expectations, this is likely to depreciate the value of the currency. Lower interest rates might promote demand pull inflation and lower exchange rates might cause cost push inflation but there are a number of factors which might prevent such changes automatically causing inflation. Existing state of the economy, consumer/investor confidence, exchange rate management might influence the final outcome. L4 (9–13 marks): for an answer that discusses the extent to which a reduction in interest rates combined with a reduction in exchange rates might impact on the price level. A conclusion will be provided. L3 (7–8 marks): for an answer that analyses why the purchase of securities will reduce interest rates and to what extent it will influence the money supply. Also analysis will be used to demonstrate the links between changes in the interest/exchange rate and possible changes in the rate of inflation. L2 (5–6 marks): for an answer that explains how Quantitative Easing will affect interest rates and the exchange rate but this will be descriptive rather than analytical and there will be only a very limited attempt to link changes in these variables to the rate of inflation. L1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Monetary policy

7 (a) Distinguish between economic growth and economic development and consider whether they are linked. [12] (b) It is difficult to calculate the value of GDP and it does not provide an accurate measure of the welfare or happiness of a country’s citizens, therefore it should not be used as an indicator of the standard of living. Discuss whether you agree with this statement. [13]

Mark scheme: 7(a) Economic growth is measured by the change in GDP/GNP in a particular time 12 period, allowing for changes in the price level. Sometimes per capita growth may be used to take into account changes in population. Economic development is a much wider term which encompasses reducing poverty; provision of education; provision of health care; maintenance of law and order. However, growth and development are linked because economic growth creates the wealth to provide education, health care and reduce poverty. L4 (9–12 marks): for an answer that recognises the difficulties connected with establishing clear links but does provide a number of reasons why such links might exist and attempts to assess the strength of each link. A conclusion would be expected L3 (7–8 marks): for an answer that provides a detailed explanation of each term and expands upon basic text book definitions. There will be clear evidence of an attempt to show that the two terms are linked. L2 (5–6 marks): for an answer that attempts to explain and distinguish between the two concepts but that remains descriptive and that makes no attempt to link growth and development. L1 (1–4 marks): For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant. 7(b) There are two elements to this question. Answers should discuss the difficulties 13 associated with alternative measures of GDP (income/output/expenditure). Then responses should address whether GDP can be used as a reliable indicator of living standards. Evidence should be produced to support the view that it is not a reliable indicator. Some reference to alternative indicators should be provided. L4 (9–13 marks): for a response that discusses both parts of the question and which attempts to identify which are the key elements in both cases. Alternative indicators should be explained and discussed and a clear conclusion provided. L3 (7–8 marks): for an answer that provides a detailed account of reasons why GDP is difficult to measure, referring to at least two alternative ways of measuring GDP. Also responses should address a range of reasons why GDP is not a reliable indicator of living standards. A limited conclusion should be provided L2 (5–6 marks): for an answer that deals with only one part of the question or both parts in a superficial manner with no reference to alternative indicators. L1 (1–4 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.

More questions on National income statistics