HCI Prelim 2018 (H1 Econ) CSQ1 Water Woes

HCI Prelim 2018 (H1 Econ)

CSQ1 Water WoesReview

Ms Jenny Wang

• SG gets water from four National Taps ‐NeWater, water from local catchment areas, desalination and imported water.

• Linggiu Reservoir in Johor supplies about 60 percent of Singapore's water needs. With more unpredictable weather patterns, water levels at this reservoir have been falling and thus there is an urgent need to strengthen our local water sources.

• The price increase will go towards maintaining Singapore's water infrastructure, and more expensive sources of water such as desalination.

(a) (i) With reference to Table 1, compare the change in total price of water for household and industrial users from phase 1 to 2. [2]

• Similarity: Total price of water for household and industrial users increase. (1m)

• Difference: However, the total price of water for household users increase at a greater percentage as compared to industrial users. (1m)

Mistakes!

• No similarity!• Increase “more” absolute vs relative change. The latter is more accurate

• Instead of comparing the change in price, some compared the level by stating total price of water for household is higher than industrial users which is not answering the question.

• Too much details!

(a)(ii) With reference to Table 1, explain two reasons why total price of water is higher for households than industrial users. [2]

(a)(ii) With reference to Table 1, explain two reasons why total price of water is higher for households than industrial users. [2]

• 2m for each reason – Identify from TABLE 1 and explain!• Water conservation tax is included in the price of water for household users but not industrial users (1m) so as to reduce the consumption of potable water by households to cut wastage (1m).

• Higher waterborne fee (WBF) is imposed on households compared to industrial users (1m) as it goes towards meeting the high cost of treating portable water and maintaining the used water network (1m).

Mistakes!

• No reference to Table 1, i.e. did not mention water conservation tax, waterborne fee and water tariff at all.

• Failed to explain the reasons.

(b) Use a demand and supply diagram and relevant elasticity concepts to explain why price of water in Singapore would have risen sharply without government intervention. [6]

Structure of answer:

1. Change in DD + PES impact on P2. Change in SS + PED impact on P3. Combined analysis


• Fall in supply + PED<1• Evidence: Extract 1 states that water levels at the Linggiu Reservoir in Johor have been falling due to more unpredictable weather patterns. Concept: The supply of water in Singapore is falling due to supply shocks.

• OR• Evidence: Extract 1 states that Singapore uses more expensive sources of water such as desalination to diversity its water sources and the cost of water transmission has increased as Singapore lays deeper pipes in an urbanized environment. Concept: The supply of water in Singapore is falling due to higher unit cost of production.

• A fall in supply will cause price of water to rise and water which is a necessity for basic survivalmeans the demand for water is price inelastic and thus the rise in price will be more than proportionate than that of a fall in quantity exchanged.


• Increase in demand + PES<1• Evidence: Extract 2 states that “water demand is expected to more than double by 2060 in tandem with population and economic growth”.

• Concepts: Population growth would mean that there are more people who need water for consumption for basic needs increase in demand for water OR

• Economic Growth increase in economic activities increase in demand for water which could be used as inputs for operation

• A rise in demand will cause price of water to rise and it is more than proportionate than the increase in quantity exchanged as the supply of water is price inelastic due to the long time period needed to develop new water sources e.g. to construct a new desalination plant.


• Combined analysis• Hence as shown in diagram 1 below, both factors reinforced each other

• Hence the market equilibrium price to increase sharply from P0 to P1.

Mistakes!

• Incorrect structure of answer – shows incorrect application of elasticity concepts

• Incorrect causation in explaining PED/PES (P affects Q, NOT Q affects P!)

• Did not explain the factor and just quote from case• Wrong factor explaining PES

(c) Explain why subsidising water for low‐income households through U‐save rebates can be justified on the grounds of equity and comment on whether such rebates are indeed equitable. [4]


Explain why it can be justified on grounds of equity (4m) • Water is a basic/essential good that should be made affordable even to low income households.

• However, in a free market, only those with the purchasing power/dollar votes will be able to afford. Low income household with lower purchasing power may be excluded from the consumption of water when the price increase as there is the lack of ability to pay – lack of effective demand.

• The lump sum U‐save rebates reduces the price of water and hence enables such households a basic level of consumption of water.

• From Extract 2, “Households in one‐room and two‐room flats will not see any increase in their bills” implies that they still will be able to enjoy their existing levels of water consumption after water price hikes.


Comment on (3m): • However, such rebates may not be entirely equitable (may not achieve aim) as:• The subsidies are based on type of housing rather than the more accurate measure of the household income level. It assumes that the type of housing is a good estimate of income level which may not be true. There may be higher income individuals living in smaller flats and benefit from a higher rebate.

• The subsidies ignore the number of person per household.

E2 (2‐3) Shows ability to use case evidence to analyse that rebates are not entirely equitable.E1 (1) Listing of unsubstantiated point(s) or some insights but not answering the question directly.

Mistakes!

• Did not explain the idea of effective demand in terms of lack of purchasing power/ability to pay

• Equity = Income equality??• By giving subsidy to the poor, it is not equitable??• Fail to link U‐save rebates to a reduction in price of water. Or for those who mentioned, they linked it wrongly to a fall in cost of production.

• What is ‘regressive subsidy’? No such concept• Did not use case materials, esp. for comments

Explain why price mechanism fails to produce public goods such as dams. [6]

Structure of answer:1. Explain dams are non‐excludable in consumption and2. Explain dams are non‐rivalrous in consumption (up to 3m);

3. Explain how the characteristic of non‐excludability will lead to absence of price signal and

4. Explain how non‐rivalry will mean zero price and thus price mechanism fails to produce dam (up to 4m)

Cap at 5m if there is totally no contextualisation/link to the example of a dam.

Didn’t I go through this before?


• A public good is non‐excludable and non‐rivalrous in consumption. An example is a dam that stores water and controls flood.

• Non‐excludable: Once a dam is provided, there is no inexpensive or practical way to restrict the benefits of a dam to only people who pay for their use since it is such a massive infrastructure and all who live in the vicinity of the dam will be protected from floods.

• Non‐rivalrous: The benefits of storage of water and controlling of floods provided by a dam that are enjoyed by one person will not reduce the quantity and quality of such benefits available to others.


• As a result of the characteristic of non‐excludability, a rational consumer motivated by self‐interest will want to be a free‐rider and not reveal his effective demand for dams as everyone wants to enjoy the benefits of dam without paying for it. There will be no price signals to indicate consumers preference for such goods to producers. Hence producers will not produce dams.


• As a result of non‐rivalry, the marginal cost of providing a public good to anadditional consumer is zero. For example, once a dam is built, the total costof the protecting the people from floods is the same regardless of thenumber of persons. There is no extra cost involved for an additional personor user of dam, marginal cost (MC) is zero.

• Since the optimal or allocative efficient quantity to supply is where Price (P)= MC, the efficient price to charge for the use of dam would be zero. Thismeans that no private firm in a free market can supply it profitably and willnot allocate resources to produce dams.

• In conclusion, due to the twin characteristics associated with public goods,there is complete market failure in the provision of dams.

Mistakes!

• No link to context• did not analyse how each characteristic (non‐excludability and non‐rivalry) specifically leads to market failure, instead lumping all the analysis together

• marginal cost of producing the good was zero?? (it should the marginal cost of allowing an additional consumer to enjoy the good was zero)

• Did not understand what the condition P = MC (Note that P = MCcondition was to achieve an allocative efficient pricing)

(d) Discuss the factors that a government should consider when deciding to build a new dam. [8]

• A government’s goal is to maximise social welfare and it has to consider both social cost and social benefit.

• A government would consider the following factors when deciding to build a new dam: private and external benefit, private and external cost and budget constraints, unintended consequences.

Rational Decision Making by Govt

How to score for evaluation here?

Factors Rank the importance of factors

Discuss the factors that a government should consider when deciding to build a new dam. [8]

• Private benefits • This refers to the benefits enjoyed by economic agents, both producers and consumers that are directly derived from the operation of the dam

• For example, the dam may result in ”improved irrigation and control floods” and thus benefitting the famers in the surrounding region.


• External benefits • This refers to benefits enjoyed by 3rd parties i.e. people who indirectly benefit from the construction or operation of the dam

• For example, when hydroelectricity is generated by the dam, the demand and hence production of electricity from other more polluting carbon sources such as fossil fuel is lowered, thus reducing global warming so that everyone else in the country benefits from less extreme weather conditions.

• Evidence: Many nations see dams as an important way to fight climate change – dams are built to control floods, improve irrigation, alleviate water shortages and generate low‐carbon hydroelectricity to replace power stations that burn fossil fuel (Extract 3, para 1).


• Private costs (in view of budget constraint)• This refers to costs involved in the construction, operation and maintenance of the dam

• Construction costs can be estimated by having construction firms to bid for the project while operation and maintenance costs can be estimated by looking at such costs that have been incurred by existing dams

• Dams are very expensive ’$2 trillion on dams in recent decades, with each dam costing more than $1.5 billion’ (Extract 3, para 1).

• Such cost would result in opportunity cost incurred in view of limited government budget – elaborate.


• External costs / unintended negative consequences• External costs refer to cost suffered by 3rd parties i.e. people who are indirectly harmed from the construction or operation of the dam

• For example, damming the river upstream may cause fishermen living downstream to suffer from lower water levels, reduced catch of fishes and hence lowered incomes; may contribute more to global warming instead of reducing it as mentioned in Extract 3, para 3 & 4.

• A drastic reshuffling of water‐scarcity hotspots over time, with mostly people upstream benefitting from the capture of river flows, but those downstream left high and dry (Extract 3, para 2). Hydroelectric dams contribute more to global warming than previously estimated, according to a study published in BioScience. Researchers found that rotting vegetation in the water means that the dams emit about a billion tonnes of greenhouse gases every year (Extract 3, para 4).


• How important are these factors in the context of dam provision? Discussion.• The easiest cost to estimate is arguably private costs as the cost of building, running and maintenance have already been incurred by many other existing local or foreign dam projects.

• While the potential benefits enjoyed by farmers from improved irrigation and potential costs borne by fishermen from reduced catch can be highly variable depending on how and how much water is redirected, the effects are nevertheless specific and thus a range of estimates can be accurately calculated if high quality studies are commissioned

• The most difficult and thus most important factor is the external costs incurred as the extent to which the reduction in carbon emissions affects the probability and severity of adverse weather conditions and the resulting damage done in a particular country are largely unpredictable as the global weather system is probably still too complex for scientist to predict with much accuracy. New studies presented new information that governments did not have in the past.


• Reasoned conclusion/judgement• Depends on priority of the govt (whether it is a significant need for an additional dam – extent of benefits)

• Severity of unintended negative consequences, given more information• Will build a new dam if social benefits > social cost

Mistakes!

• Lack of economic framework• did not refer to government’s objective of maximising social welfare• lopsided analysis, where the private and external benefits of the dams were not considered.

• serious conceptual problem was after explaining in d(i) dams as a public good and then later claim in d(ii) that they are merit or demerit goods.

• misinterpreted the preamble about “people living upstream are benefiting from the capture of river flows at the expense of those downstream” as inequality instead of external cost.

Mistakes!

• Evaluation• did not provide a clear stand or conclusion at the end of their essay. Such students would hence score badly for evaluation.

• merely concluded by summarising that many determinants need to be considered, without ASSESSING these determinants. One such way would be to consider the relative importance of the determinants / rank the determinants in influencing resource allocation

(e) With reference to case materials and/or your own relevant knowledge, discuss the impact of the water crisis on Thailand’s standard of living. [12]

Introduction (KIA) Part 1: Discuss impact of water crisis on Thailand’s material standard of living Part 2: Discuss the impact of water crisis on Thailand’s non‐material standard of living Conclusion – comment on overall impact + considering the extent


Introduction• Standard of living refers to the well‐being of an average person residing in the country which includes both material and non‐material aspects. Material well‐being includes the availability of quantity of goods and services for consumption and non‐material is the quality of life.

• I will now discuss how the water crisis in Thailand will have impact on its standard of living.

You MUST define SOL!


Part 1: Discuss impact of water crisis on material standard of living

Explain water crisis brought by the drought caused a supply shock to the production of rice crops ↓ SRAS + a fall in tourism with the cutting short of the April’s Songkran festival ↓X ↓AD Illustrate and explain with AD‐AS diagram how both AS and AD fall and they reinforce each other to cause a fall in real national income by multiplier effect, shown by an expectation of cut in econ growth of 0.6‐0.8 % points


• Lowers real national income and hence household income lowers ability/purchasing power to consume goods and services especially by the farmers – 20 billion baht loss in purchasing power among farmers (Extract 4) and those work in tourism related industries like travelling agencies, and hotels lowers material SOL

• However, drought crisis comes water‐related business opportunities. The higher demand for electronics equipment and systems for water technology, as well as other water‐related businesses could increase their income improve their material SOL instead.


Part 2: Discuss the impact of water crisis on non‐material standard of living• Insufficient water for consumption lacks basic sanitary and negatively affect health

• Patched lands and damaged roads inconvenience people lowering their quality of life

• Government may spend lesser on essentials that affects quality of live e.g. healthcare and education Evidence: bad news for the government whose finances are already in the red.

• Overall, non‐material SOL falls

(e) With reference to case materials and/or your own relevant knowledge, discuss the impact of the water crisis on Thailand’s standard of living. [12]Conclusion• While it is expected that “economic growth is cut by 0.6% to 0.8%” with the water crisis, it is not clear whether real economic growth is positive or negative. If real economic growth is still positive, material standard of living for an average person may still rise.

• Nevertheless, a better indicator of real GDP per capita should be used to take into account of the population growth. But if the population growth is higher than the real economic growth, there will be a fall in real GDP per capita.

(e) With reference to case materials and/or your own relevant knowledge, discuss the impact of the water crisis on Thailand’s standard of living. [12]Conclusion• Besides, not everyone is affected equally – those in areas affected by the drought + work in the agricultural and tourism sectors will most likely be badly affected. But farmers who can adapt their agricultural lands to meet changing water resource conditions may be less badly affected by the droughts as they are able to negate/ minimise such effects. Their material SOL is less affected.

• The impact on non‐material SOL is widespread and arguably negatively affected.

• Overall, I would say there is a deterioration in the overall standard of living especially for the affected parties mentioned above and would be worse if the drought prolongs as ”the damage could reach 154 billion baht”.

Judgement


Marking descriptorsL3: 6 – 9 Well‐balanced and developed answer that covers BOTHmaterial and non‐material SOL.There should be usage of economic concepts (AD/AS) AND case evidence.Shows ability to discuss impact on different groups of peopleL2: 3 – 5 One sided answer (only material OR non‐material SOL) or weak development of analysis. It could be an answer that did not show good use of AD/AS analysis and/or insufficient link to standard of livingL1: 1 – 2 Vague, descriptive or list‐like answerEV: 1 – 3

For valid evaluative comment. For maximum marks, there should be a thoughtful consideration of most of the issues that are relevant before reaching a considered judgement.

Documents

HCI Prelim 2018 (H1 Econ) CSQ1 Water Woes