A Level H1 Economics Practice Paper 5

TuitionGoWhere Practice Paper - Economics H1 A-Level

Answer Key & Marking Scheme - Version 5

Subject: Economics H1
Topic: Data Response (Microeconomics Focus: Market Failure, Elasticity, Government Intervention)

Marking Guidelines

• AO1 (Knowledge): Definitions, facts, basic concepts.
• AO2 (Analysis): Application to context, diagrams, logical chains of reasoning.
• AO3 (Evaluation): Judgments, weighing arguments, considering limitations.

Section A: Answers

1. Compare the growth in New EV Registrations with the growth in Public Charging Points from 2019 to 2023. [4]

• EV Registrations: Increased significantly from 650 in 2019 to 11,500 in 2023. This is an increase of approximately 1,669% (or roughly 17.7 times). [2]
• Charging Points: Increased from 1,200 in 2019 to 6,200 in 2023. This is an increase of approximately 417% (or roughly 5.2 times). [1]
• Comparison: While both increased, the growth rate of EV registrations was much faster than the growth of charging infrastructure. The gap between demand (cars) and infrastructure supply widened in absolute terms, though infrastructure is catching up. [1]

2. Describe the trend in the EV Share of Total New Car Registrations from 2019 to 2023. [2]

• The EV share increased consistently every year from 2.3% in 2019 to 34.7% in 2023. [1]
• The rate of increase accelerated, particularly between 2020-2021 and 2021-2022, indicating rapid adoption. [1]

3. Using the concept of opportunity cost, explain one trade-off faced by the Singapore government when allocating budget to build public charging infrastructure instead of other public goods. [4]

• Definition: Opportunity cost is the next best alternative foregone when a choice is made. [1]
• Application: Resources (land, capital, labor) used to build charging points cannot be used for other public goods, such as building more public housing (HDB) or improving healthcare facilities. [1]
• Trade-off: The government faces a trade-off between promoting green transport (long-term environmental benefit) and providing immediate social welfare (e.g., housing/healthcare). [1]
• Consequence: If the budget is finite, increased spending on charging infrastructure may require higher taxes or reduced spending in other sectors, affecting overall societal welfare. [1]

4. Explain how the Vehicular Emissions Scheme (VES) acts as a market-based policy to correct the negative externality of pollution from cars. [6]

• Identification of Externality: Petrol cars generate negative externalities (pollution/congestion) where Social Cost > Private Cost. The market over-consumes them. [1]
• Mechanism (Tax/Surcharge): VES imposes surcharges on high-emission cars, increasing their private cost (price). This internalizes the externality. [2]
• Mechanism (Subsidy/Rebate): VES offers rebates for low-emission EVs, lowering their effective price. This encourages substitution towards cleaner vehicles. [2]
• Outcome: By altering relative prices, VES incentivizes consumers to choose EVs, reducing the quantity of high-emission cars and moving the market closer to the social optimum. [1]

5. Calculate the expected percentage change in the quantity demanded of EVs if the price of EVs falls by 10%. Show your working. [2]

• Formula: PED = % Change in Qd / % Change in Price
• Substitution: -1.4 = % Change in Qd / -10%
• Calculation: % Change in Qd = -1.4 × -10% = +14%
• Answer: Quantity demanded is expected to increase by 14%. [2]

6. Explain the significance of the Cross Elasticity of Demand (XED) value of +0.8 between EVs and petrol cars. [4]

• Sign of XED: The positive sign (+) indicates that EVs and petrol cars are substitutes. [1]
• Magnitude: The value of 0.8 indicates they are relatively close substitutes. A 1% increase in the price of petrol cars leads to a 0.8% increase in the demand for EVs. [2]
• Implication: Policies that make petrol cars more expensive (e.g., COE prices, petrol taxes) will effectively shift demand towards EVs, supporting the government's green transition goals. [1]

7. Explain why the "higher upfront cost" of EVs might slow down the rate of adoption despite government rebates. [4]

• Income Constraint: Even with rebates, the absolute price of EVs may remain higher than ICE vehicles. For middle-income households, this high initial outlay is a significant barrier due to budget constraints. [2]
• Consumer Psychology/Uncertainty: Consumers may be deterred by the high upfront cost if they are uncertain about long-term savings (electricity vs. petrol) or residual value, making them hesitant to switch despite subsidies. [2]

8. Using a demand and supply diagram, illustrate the impact of an increase in the price of lithium on the market for EVs. [6]

• Diagram Requirements:
  • Axes labeled Price (P) and Quantity (Q). [1]
  • Initial Demand (D) and Supply (S) curves intersecting at equilibrium P1, Q1. [1]
  • Supply curve shifts to the left (S1 to S2) because lithium is a cost of production. [2]
  • New equilibrium at P2 (higher) and Q2 (lower). [1]
  • Clear labeling of shift and new equilibrium. [1]

9. Explain two reasons why the Price Elasticity of Supply (PES) for EVs might be relatively inelastic in the short run. [4]

• Production Lags: Building new factories or retooling existing ones for EV production takes time. Firms cannot instantly increase output in response to price changes. [2]
• Supply Chain Constraints: Shortages of key components (like semiconductors or batteries) limit the ability of manufacturers to ramp up production quickly, making supply unresponsive to price signals in the short run. [2]

10. Discuss whether the increase in Public Charging Points is a necessary condition for the continued growth in EV registrations. [6]

• Argument for Yes (Necessary): "Range anxiety" is a major deterrent. Without sufficient charging infrastructure, consumers are unwilling to buy EVs regardless of price. Extract 1 shows correlation between charging points and registrations. [3]
• Argument for No (Not Solely Necessary): Other factors like lower running costs, environmental awareness, and government taxes on ICE cars also drive adoption. Home charging might suffice for many, reducing reliance on public points. [2]
• Judgment: While not the only factor, it is a critical enabling condition. Without it, growth would likely plateau as early adopters (who can charge at home) are saturated. [1]

11. Explain how the negative externality of carbon emissions from petrol cars leads to a loss of social welfare. Use a diagram. [8]

• Definition: Negative externality occurs when Social Cost (MSC) > Private Cost (MPC). [1]
• Diagram:
  • Axes: Price/Cost, Quantity.
  • Demand curve = Marginal Private Benefit (MPB) = Marginal Social Benefit (MSB) (assuming no consumption externality for simplicity, or separate if needed).
  • Supply curve = Marginal Private Cost (MPC).
  • MSC curve lies above MPC. [2]
  • Market Equilibrium (Qm) where MPC = MPB.
  • Social Optimum (Qopt) where MSC = MSB.
  • Qm > Qopt (Overproduction). [2]
• Explanation: At Qm, the cost to society of the last unit produced (MSC) is greater than the benefit to consumers (MSB). This creates a deadweight loss (welfare loss), represented by the triangle area between MSC and MSB from Qopt to Qm. [2]
• Conclusion: Resources are misallocated, leading to a net loss in societal well-being. [1]

12. Evaluate the effectiveness of subsidies (rebates) compared to indirect taxes (surcharges) in promoting the adoption of EVs. [10]

• Effectiveness of Subsidies (Rebates):
  • Pros: Directly lowers the price of EVs, making them more affordable. Increases demand (shifts D right). Politically popular as it "rewards" green behavior. Helps overcome high upfront cost barrier. [3]
  • Cons: Costly to government (opportunity cost). May benefit wealthy buyers who would have bought EVs anyway (deadweight loss of subsidy). Does not directly penalize polluters. [2]
• Effectiveness of Indirect Taxes (Surcharges):
  • Pros: Internalizes the externality. Raises revenue for government (can fund infrastructure). Discourages consumption of demerit goods (ICE cars). [3]
  • Cons: Regressive (hits lower-income car buyers harder). If demand for cars is inelastic (necessary for work), consumption may not fall much, just cost of living rises. Can cause inflationary pressure. [2]
• Evaluation/Judgment:
  • Subsidies are more effective for promoting EV adoption (pull factor), while taxes are effective for discouraging ICE cars (push factor).
  • Given the goal is transition, a combination is best. However, if budget is constrained, taxes might be more sustainable.
  • Final Judgment: Subsidies are likely more effective in the early adoption phase to overcome psychological and financial barriers, but taxes ensure long-term behavioral change. The VES (combining both) is the most effective approach. [2]

13. Define the term technical recession. [2]

• A technical recession is defined as two consecutive quarters of negative economic growth (fall in Real GDP). [2]

14. If the production of EV batteries creates significant water pollution in the manufacturing country, identify the type of market failure this represents. [1]

• Negative externality of production. [1]

15. State one determinant of Price Elasticity of Demand (PED) that would make the demand for EVs more elastic. [1]

• Availability of close substitutes (e.g., petrol cars, public transport). [1]
• (Alternative: High proportion of income spent on the good.)

16. Explain the difference between movement along the demand curve and a shift of the demand curve for EVs. [4]

• Movement along: Caused only by a change in the price of the EV itself. Example: If EV prices drop, quantity demanded increases (extension of demand). [2]
• Shift of curve: Caused by a change in non-price determinants (e.g., income, taste, price of substitutes, government policy). Example: If petrol prices rise, demand for EVs increases at every price level (shift right). [2]

17. Calculate the percentage increase in Total New Car Registrations from 2020 to 2021. [2]

• 2020: 26,800
• 2021: 29,200
• Change: 29,200 - 26,800 = 2,400
• % Increase: (2,400 / 26,800) × 100% ≈ 8.96%
• Answer: Approximately 9.0% (or 8.96%). [2]

18. Explain why the government might consider EVs to be merit goods. [4]

• Definition: Merit goods are goods that are under-consumed in a free market because consumers undervalue the long-term benefits. [1]
• Application: Consumers may ignore the long-term environmental benefits of EVs (positive externality) or the long-term cost savings. [1]
• Information Failure: Consumers may lack information about the total cost of ownership or environmental impact. [1]
• Government View: Government intervenes (subsidies) to encourage consumption to a socially optimal level, correcting the information failure/undervaluation. [1]

19. Discuss one potential government failure that could arise from the rapid subsidization of EV infrastructure. [4]

• Definition: Government failure occurs when intervention leads to a net welfare loss. [1]
• Example: Misallocation of resources. If charging points are built in areas with low demand (white elephants), resources are wasted. [1]
• Opportunity Cost: Funds spent on excessive infrastructure could have been better used for public transport or healthcare, leading to a greater overall welfare loss. [1]
• Unintended Consequences: Subsidies might distort the market, encouraging inefficient technologies or creating dependency on government support, hindering private innovation. [1]

20. Evaluate the view that "Market forces alone are sufficient to achieve the optimal level of EV adoption in Singapore." [10]

• Argument for Market Forces:
  • As battery technology improves, costs fall (economies of scale), making EVs naturally competitive.
  • Consumer preference for green products is rising, shifting demand right without intervention.
  • High petrol prices (global market) naturally incentivize switching to EVs. [3]
• Argument Against (Market Failure):
  • Negative Externalities: ICE cars cause pollution/congestion not reflected in price. Market will over-consume ICE cars. [2]
  • Positive Externalities: EVs provide environmental benefits not captured by the buyer. Market will under-consume EVs. [2]
  • Information Failure: Consumers may not fully understand long-term benefits. [1]
• Evaluation/Judgment:
  • Market forces are slow and may not meet urgent climate goals (Singapore Green Plan).
  • Without intervention, the "optimal" social level (considering environment) will not be reached; only the private optimum will be.
  • Conclusion: Market forces are insufficient. Government intervention (taxes, subsidies, regulation) is necessary to internalize externalities and accelerate adoption to the social optimum. [2]

END OF MARKING SCHEME