Tut 22 Answers

7/24/2019 Tut 22 Answers

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HWA CHONG INSTITUTIONYear Two H2 Economics 2014

Tutorial 22! "icroeconomics II # "ar$et %ailure & Go'ernment Inter'ention

TUTO(IA) 22! "A(*ET %AI)U(E & GO+E(N"ENT INTE(+ENTION

Section A! Com,lete -EE .uestions in C/a,ter 22 lecture notes

Section -! Essa ractice

uestion 1! TYS 2003 4(a) Explain why pollution and congestion caused by cars are likely to cause market failure. [10]

(b) iscuss whether the !ingapore go"ernment currently adopts appropriate policies to o"ercomethis market failure. [1#]

Eaminer5s re,ort TYS! N2003 4

$his was one of the most popular %uestions. &t produced some "ery good answers' particularly for part (a)' withthe best answers also gi"ing excellent e"aluati"e discussion of !ingapores approach to dealing with thisproblem.

common response' and one that could ha"e been impro"ed' was to set the diagrams within the context of theproduction of cars rather than the use of cars. An im,ro'ement woul6 /a'e 7een ac/ie'e6 i8 t/e /ori9ontalais on t/e 6ia:ram /a6 ta$en account o8 t/is 6istinction i;e; t/rou:/ use o8 .uantit o8 miles 6ri'en ort/e num7er o8 cars owne6 rat/er t/an num7er o8 cars ,ro6uce6;*ollution was thus presented as the resultof the manufacture of cars rather than the use of cars' although all policies later presented in the !ingapore casereferred to pollution (and congestion) caused by the use of cars.

(a) &n general terms this part of the %uestion was well answered and +e"el , marks were fre%uently gained.iagrams were normally correctly drawn and' alt/ou:/ t/e ma


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,olicies or consi6ere6 onl one ,olic an6 t/en in a rat/er a7stract manner;

?a@ E,lain w/ ,ollution an6 con:estion cause6 7 cars are li$el to cause mar$et 8ailure; 10B

1stSim,le Sc/ematic lan ?Cost>-ene8it A,,roac/ # Use t/is 8or car tri,s onl?S,ecial Case to :el 7etter wit/ t/e E( Inter'ention@@

&2$3456$&42 7 5se -&-ey word8 /arket ailure.

&ssue8 &dentify dri"ing will result in negati"e externality 7 pollution and congestion.

pproach8 $his essay aims to9.

:4; 7 5se !EE

efine negati"e externality.

efine and gi"e examples of */6' */: and E/6 of dri"ing.

Explain how market fails and leads to o"er 6ri'in:@&n a free market' dri"ers only weigh the pri"ate or indi"idual costs and benefits of dri"ing a car and donot take into account the negati"e externality they create to other road users.

$he ri'ate "ar:inal Cost ?"C@of dri"ing measures the additional cost to the dri"er from thea66itional


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included in the ,ri'ate costsof consumers. >ence we can say that there is a di"ergence between theSocial "ar:inal Cost ?S"C@ an6 t/e "C= an6 as a result S"C lies a7o'e t/at o8 "C; I;e; S"C "C F E"C; Ahat consumers pay is not the same (i.e. di"ergence) as what society has to pay.

Figure 1: External Cost from Car Journeys/Trips

&n the diagram abo"e' the mar$ete.uili7rium%uantity of car ?ourneys=trips occurs at mwhen dri"ersaccount only for their pri"ate benefit and cost i.e. "-"C. >owe"er' due to the presence ofnegati"e externalities (E/6 which is measured by distance :) of congestion and incon"enience toother road users' the social cost of car usage is higher than the pri"ate cost. >ence' the sociale%uilibrium occurs when society takes into account of the negati"e externalities when S"-S"C at S(assuming no positi"e externalities present' */:B!/:) T/ere is an o'erconsum,tion o8 cars ont/e roa6 7 m>S; T/e o'erconsum,tion create6 an increase in social cost o8 -C Sm= w/ilet/e social 7ene8it is onl ACSmresulting in a 6ea6wei:/t wel8are loss o8 A-C;CONC)USION>ence' pollution and congestion caused by cars are negati"e externality which is a form of marketfailure.

@nd!imple !chematic *lan ("ar$et -ase6 A,,roac/ # %YI)

&2$3456$&42 7 5se -&-ey word8 /arket ailure.

&ssue8 &dentify dri"ing will result in negati"e externality 7 pollution and congestion.

pproach8 $his essay aims to9.

:4; 7 5se !EEefine negati"e externality.

efine and gi"e examples of */6' */: and E/6 of dri"ing.

Explain how market fails and leads to o"er


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inter"ention' fail to deli"er an efficient allocation of resources to produce goods andser"ices.

&ssue ue to the negati"e external cost incurred by pollution and congestion' markets do

not capture the full cost associated with car,rice6F the usage of cars which willlead to an ine88icient allocationof resources and hence mar$et 8ailure.

or each a66itional car' the social mar:inal cost ?S"C@ inclu6es t/e ,ri'ate mar:inal cost?"C@ o8 t/e car ,lus t/e eternal mar:inal cost ?E"C@. >ence the actual cost borne by thesociety is represented by the !/6' which takes into account the full opportunity cost to society ofan extra unit of car. !/6 B */6 G E/6.

Hwa C/on: Institution; All (i:/ts (eser'e6; Teac/ers5 Co,

H


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Social "ar:inal Cost ?S"C@ ri'ate "ar:inal Cost ?"C@ F Eternal "ar:inal Cost ?E"C@

%i:ure 1! Eternal Cost 8rom t/e Usa:e o8 Cars

s seen in igure 1' the presence of a 2egati"e consumption externality causes a 6i'er:encebetween pri"ate and social costs of using cars.

$he !/6 lies abo"e the */6. rom societys "iewpoint' the !/6 includes both the */6 and E/6(i.e. !/6 B*/6 G E/6)

ssume that dri"ing cars yields no positi"e externality' E/:B0. $hus' */:B!/:.

ssuming perfect competition' mar$et e.uili7rium %uantity of usage of cars which can be

measured in terms of no of car trips or %uantity of miles dri"en is m= where"- "C;

>owe"er' this output does not represent the sociall o,timal le'el o8 consum,tionbecause itdoes not take into account the negati"e externality or third party costs imposed on society.

$he sociall e88icientle"el of consumption or use of cars should be at Swhere S"-S"C' wherethe full costs and benefits and costs to society are included.

Csis less than the market e%uilibrium le"el of consumption' Cm. where */: B */6. $hus there iso'erconsum,tion or use o8 cars by Cm7 C!

rea CmC!:6 is the total social cost incurred for the o"erconsumption Cm7 C!.

rea CmC!: is the total social benefit gained for the o"erconsumption Cm7 C!.

!ince total social costs incurred exceeds the total social benefits gained for o"erconsumption C m7

C!' rea :6 represents the 6ea6wei:/t wel8are lossdue to o"erconsumption of C!7 Cm.


#

Quantity

Price

C! Cm

PMB=SMB (since EMB=0)

B

C

A

SMC = PMC + EMC

"C

*m

E"Cat Cm*s


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CONC)USION>ence' pollution and congestion caused by cars are negati"e externality which is a form of marketfailure.

?7@ iscuss w/et/er t/e Sin:a,ore :o'ernment currentl a6o,ts a,,ro,riate ,olicies to o'ercomet/is mar$et 8ailure; 13B

!imple !chematic *lan

&2$3456$&42:4;

*olicies that o"ercome congestion *olicies that o"ercome pollution

E3*86ontrol car usage

64E86ontrol ownership

4thers8*ublic transport

for alternati"es

3ules and regulations

Explain how the policies work and their possible limitations

3each a synthesis comparing the policies6426+5!&42

INT(OUCTION

6urrently the go"ernment has adopted "arious policies to reduce congestion and pollution by reducingcar usage' ownership and pro"ision of an efficient public transport system. $he ultimate goal ofimplementing these policies is to effecti"ely reduce the number of cars dri"ing on the road per hour' to

the socially optimal le"el.

-OY 1 # to re6uce con:estion ,re6ominantl

"ain Solution 1 ?Electronic (oa6 ricin: > E(@!

%i:ure 2! E( to internalise E"C 8rom car tri,s


I

D

Cost/Benefit

Quantity


SMC = PMC + EMC

C

B

C!

Cm

"C

A

E"C at s

E(

*s

*m

*!< t

"C F ta


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3eferring to igure @' the go"ernment make car users to pay a fee (a congestion tax on each unit ofoutput)' the amount of the tax corresponding to the external marginal cost (i.e. thirdence the method is more e.uita7lebecause it deters those who do not need to enter the6: during the hike of the peak period from entering. >ence' those who enter during the hike of thepeak will pay the /i:/est E( c/ar:esas they will be the ones who are both willin: an6 a7leto paythose charges. &n this way' this method s,rea6s outthe "olume of traffic across different hours of theday thus a"oiding hea"y concentration of traffic at peak or rush hours.

)imitations ?GO+E(N"ENT %AI)U(E@)AC* O% IN%O("ATION! &s it easy to obtain information of the actual cost of reducing congestionalong 4rchard during peak hours to work out the E3* rateJ $he go"ernment may not possess all theinformation needed to be able to estimate the Kcorrect amount of tax to impose. n o"er"alued E3*may reduce the optimal use of the road' while an under"alued E3* may not reduce traffic congestion bymuch. $hus the lack of information may lead to go"ernment failure. lso' how does the go"ernmentestablish what citiDens want it to doJ Electoral system is not an ideal way to disco"er this. *roponentsof go"ernment failure argue that the free market mechanism is the best way of finding out consumerpreferences.

)OOHO)ES!E3* on some roads may simply ha"e the effect of di"erting traffic' and hence congestion'to roads where there are no E3*s. s a conse%uent more E3* gantries ha"e to be set up where traffichas increased thus creating a problem of chasing after the ?amF.

"ain Solution 2 ?Certi8icate o8 Entitlement > COE@!&n theory' this is a %uota system to restrict car ownership used in !ingapore. 4fficially called the LC!("ehicle %uota system)' it re%uires a car buyer to purchase a 6ertificate of Entitlement (64E) for thepurchase of new "ehicles. $hesu,,l of 64E is strictly regulated=rationed by the go"ernment whilethe price of 64E is sub?ect to bidding' hence it is determined by market forces. *rices of 64Essometimes soared' whilst at other times it might plummet according to demand and supply of 64E inthe market o"er time.

$hus' to effecti"ely control car ownership' the go"ernment will be reducing the number of 64E forbidding o"er time so as to increase the price of 64Es in order to deter car ownership.


M


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Note: COE is not a form of marketable permits.

)imitations ?GO+E(N"ENT %AI)U(E@

)AC* O% IN%O("ATION! o"ernment may estimate the number of 64Es wrongly. $here weretimes that the price dropped to N1 when many cars were scrapped and the number of 64Es inthe open market increased tremendously.

-)UNT INST(U"ENT! it affects those who are not within the targeted group. $hose whousually dri"e during off


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-OY 2 # to re6uce air ,ollution/andatory installation of catalytic con"erter in carsQ car scrapping and annual inspection8 ensuring carexhaust emission from all "ehicles in use meet the limits set by /inistry of En"ironmentQ banning of

leaded petrol to reduce sulphur content diesel fuelQ introducing tax incenti"es to narrow the price gapbetween electric=hybrid "ehicles and con"entional ones.ConclusionDSnt/esis ?%INA) JUG"ENT@

t present' the issue of traffic congestion is ade%uately managed by a combination of restrictions on carownership and usage' matched with an efficient public transportation while pollution is kept undercontrol by "arious regulations.

>owe"er' in the long run' with !ingapores population increasing and not matched by an increase inland space' it would be almost impossible to increase the number of pri"ate "ehicles. $hus the only"iable solution in the future would be to get most of !ingapore households to rely on public transport.$owards this end the go"ernment has already stepped up construction of /3$ lines to link up "ariousparts of the island so to pro"ide a comprehensi"e rail network to offer a good alternati"e to pri"ate car

ownership.

uestion 2! IJC 2012

(a) Explain whether expressways and traffic lights are examples of public goods. [10]

+earning 4b?ecti"es81) pplying the characteristics of ri"alry and excludability to a good to arri"e at a proper

categoriDation.@) +earning how to handle an ambiguous context' e.g. expressways are ri"al during peak


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of optimal resource allocation calls for pro"ision of public goods and ser"ices at Dero price or nocharge. >owe"er' if the price is Dero' no firm would want to supply the good. $his results in amissing market.

good is nonence' go"ernment may choose not to buildthe gantry at some areas and as a result there is non


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Conclusion

$raffic light is an example of public good as it satisfies the two characteristics of non


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(Adot !"A structure in "ntro) Pro#ide definitions of Merit good and Pu$%ic good

State aroac& of 'distinguis&ing' t&e concets using criteria ri"alry' excludability and

pro"ision

-o6!

istin:uis/in:Criteria

"erit :oo6s u7lic :oo6s

(i'alrous in consum,tion< efinition8 $he

consumption of the goodby one persondiminishes the amounta"ailable for another

person to consume.

YesExplain the concept ofri"alry using an example ofone persons consumptionof healthcare ser"ice suchas flu "accination

< when one personconsumes "accination'there will be one lessa"ailable for the others

NoExplain the concept of non


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to supply the good for aprofit

ote ,o-e#er. -&i%e t&efree maret tends to

roduce merit goods. ittends to $e under*

roduced and under*consumed due to ro$%emsof imerfect informationand t&e eistence of

ositi#e eterna%ities1 So.t&e ro#ision of meritgoods tends to create t&at

of a artia% maret fai%urero$%em1

on*ec%uda$i%ity

freet/esis I!E/: hard to determineQ E/:"aried across uni"ersity courses and othercountert/esis II8 E%uity issue from free highereducation and other counterE!&!

6426+5!&42

Intro6uction

/arket failure occurs when markets operating without go"ernment inter"ention' fail to deli"er an

efficient or optimal allocation of resources.


1,


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$herefore' social welfare may not be maximised 7 leading to a loss of allocati"e and producti"e

efficiency (i.e. welfare losses for society). $he economic case for free uni"ersity education can be examined mainly based on the rele"ant

sources of market failure in uni"ersity education' namely merit good and e%uity arguments.

T/esis I! Economic Case 8or %ree Uni'ersit E6ucation > "erit Goo6

$he market for uni"ersity education in !ingapore can be an example of a merit ood.

&t has positi"e externalities and is deemed intrinsically desirable by the go"ernment.

6oupled with imerfect information' the good tends to be underence in this case of a positi"e consumption externality' the students are not concernedabout the external benefits to third parties but their own pri"ate benefits as the external benefitsare OunpricedO by the price mechanism and not included in the pri"ate benefits.

s such' we can say that the free market has o"erence' the actual benefitreaped by the society is represented by the !/:' which takes into account the full benefits tosociety of an extra unit of education.


1H


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%i:ure 1! Eternal 7ene8it 8rom consum,tion o8 uni'ersit e6ucation

s seen in igure 1' the presence of an external benefit causes a di"ergence between pri"ate andsocial benefits' with !/: abo"e */: as !/: B */: G E/:.

ssume that consumption of education in this case yields no negati"e externality' E/6B0. $hus'

*/6B!/6.

(ssuming perfect competition' market e%uilibrium %uantity of education is Cm' where */: B

*/6' as consumers and producers of "accines only consider their own benefits and costs.)

>owe"er the socially efficient %uantity of education should be at C ! where !/:B!/6' where the

full costs and benefits and costs to society are considered. Cmis less than the market e%uilibrium

%uantity' C!. where */: B */6. $hus there is underconsumption of education by the %uantity C !

7 Cm. The merit ood arument hence forms the main economic case for free uni)ersit!

education when the positi)e e(ternailties enerated is sufficientl! hih.

$heoretically' the go"ernment might pro"ide a subsidy to producers corresponding to the externalmarginal benefit i.e. subsidy B E/6 at C!(distance :) on each unit of education. $his shifts the*/6 downwards so that the new */6' which e%uals */6 7 subsidy' coincides with the */: atC!.

%i:ure 2! Su7si6 to internalise E"- 8rom uni'ersit e6ucation


1#

Price

Quantity

PMC=SMC (since EMC=0)

SMB = PMB + EMB

B

A

Cm C!

"-

E"-at m*!

*m

Su7si6 E"- at S

Price PMC=SMC (since EMC=0)

SMB = PMB + EMB

B

A

"-

D

PMC 3 su$sidy

*!

*!7 s

*m


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>ence' the new market e%uilibrium %uantity where */: B */6 7 subsidy' now coincides with thesocially efficient %uantity C!' where !/: B !/6.

&f the subsidy accurately reflects the external marginal benefit' students are now in effect beingcompensated for the external benefit they bring to third parties as the price they are paying is nowlower at *!7 s' compared to *mbefore the subsidy.

T/e eternalit /as t/en 7een internalise6;

:esides positi"e externality' in8ormation 8ailuremay also occur as students cannot possibly know

the specific pri"ate benefit to them of getting good grades at uni"ersity. $hey will be well aware ofthe sacrifice re%uired to study' but will not know the benefits to them in terms of a future ?ob'salary' status and skills. $herefore' go"ernment subsidy may also be used to address theunderconsumption of uni"ersity education due to information failure.

Anti>t/esis D E'aluation !

!ubsidies used to internalise a positi"e externality is a marketowe"er' in practice' it is 6i88icult to 6etermine t/e amount o8 su7si6 accuratel in order toattain the socially optimum le"el of education' as it is difficult to accurately measure the extent ofE/: due to tangible and intangible benefits.

$o argue that the E/: is sufficiently large to warrant a large subsidy such that *B0 is highlydebatable. (Especially' when compared to primary and secondary le"els of education' the E/: oftertiary education may be significantly lower' with */: significantly higher.)

$herefore' if the main benefit of a degree is a higher salary to the student' it seems ?ustifiable thatthe recipient of this benefit s&ou%dpay for the personal benefit he=she recei"es. $hus associatedto the subsidy is e%uity consideration (which is discussed below).

&n addition' the le"els of E"- also 'ar at 6i88erent t,es o8 uni'ersit e6ucation 7 the E/:may be higher for certain specialiDation' such as medicine and law' as opposed to rcheology.($his is again a highly Onormati"eO issue' but gi"en the context of !ingapore' it is likely to be thecase.)

&f this is indeed the case' "aried subsidy amount catering to different types of higher educationmay need to be imposed (according to the "aried extent of E/: generated).

+ast but not least' in the analysis' we assume6 t/at "CS"C' hence the potential negati"e

externalities of higher education ha"e been mainly ignored in the debate.

n alternati"e to hea"y subsidies by the go"ernment' would be 6irect ,ro'isionof uni"ersityeducation to supplement the underproduction by the pri"ate sector. &n !ingapores case' howe"er'

the go"ernment does not pro"ide uni"ersity education at no cost to the consumer' but rather

contributes to the costs of setting up the public uni"ersities (campus construction etc). T/us= on 7alance= 7ase6 on t/e merit :oo6s ar:ument= t/e :roun6 8or 8ree uni'ersit

e6ucation across t/e 7oar6 seems s/a$; A more cali7rate6 a,,roac/ o8 customi9e6

su7si6 accor6in: to E"- 7 uni'ersit courses ma 7e re.uire6;

T/esis II! Economic Case 8or %ree Uni'ersit E6ucation # Income Ine.ualit


1I

QuantityCm Cs


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$here is also a common argument that uni"ersity education should be free to ensure Oe%uality of

opportunityO. /arkets can generate what is percei"ed to be an Kunacceptable distribution of income and too

high a le"el of Osocial exclusionO where citiDens of lower incomes are denied access to essentialgoods and opportunities considered Knormal by a society' like uni"ersity education. E1g1 Pu$%ic

uni#ersities in 4ermany c&arge no or on%y margina% tuition fees. i1e1 tuition fees are most%y or

com%ete%y co#ered $y u$%ic funds1 S&ou%d Singaore $e %ie 4ermany5

&n !ingapore' the transition to a knowledget/esis D E'aluation!

&s it e%uitable for students to make a financial contribution to their degree educationJ

$hey stand to gain financially from a degree 7 education is an in"estment and it is rational for

students to OborrowO at this stage of their life


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increase such a hefty sum in"ested into education' there are high opportunity costs ongo"ernment funds.

$here may also be :o'ernment 8ailureas well in terms of bureaucracy' inefficiency and lack of

public support for free uni"ersity education.

Conclusion

$he economic case for free higher education in !ingapore is based on merit good argument and

income ine%uality considerations. or merit good argument' e"en if positi"e externalities exist' it is unclear whether the extent is

sufficient to ?ustify a high subsidiDation' gi"en high inter"ention cost and potential for go"ernment

failure. 4n the other hand' negati"e repercussions of free higher education on income ine%uality in the

long term can be significant. or !ingapore' as the inter"ention cost of hea"y subsidy is high' less extreme forms and multiSIE O)ICIES to o'ercome occu,ational immo7ilit o8 la7our ?macro ,olic@

$he !ingapore go"ernment encourages the workers to attend courses to upgrade their skills tomeet the changing demand of the economy. $hey pro"ide retraining programmes to helpworkers obtain the re%uisite skills for the new economy. or example' in !ingapore' theAorkforce e"elopment gency (A) de"eloped a 6ontinuing Education and $raining (6E$)infrastructure' based on an established network of &ndustry !kills and e"elopment 6ouncils' tohelp it chart the future of manpower de"elopment in each economic sector. E:' in con?unctionwith the A' also helps in the retraining of */E$s (*rofessionals' /anagers' Executi"es and

$echnicians). &n @00P the go"ernment introduces the !kills *rogram for 5pgrading and 3esilience (!*53)

where a subsidy is pro"ided to workers who attend higher courses to upgrade their educationalknowledge and skills.

$his reduces market failure caused by occu,ational immo7ilit as the policy allows theworkforce in !ingapore to ac%uire new skills to find a ?ob in the sunrise industries such as theser"ice sector.

)imitations!!uccess of training subsidies would depend on whether the a:e :a,= attitu6e :a,= a,titu6e :a, &e,ectation :a,with regards to training S ?ob openings can be bridged.

olicies to o'ercome :eo:ra,/ical immo7ilit o8 la7our$he !ingapore go"ernment has also spent a lot of resources to impro"e the trans,ort networ$ sstemsuch as the extension of the "(T lines to more parts of the country and the building of moree,resswas to impro"e the accessibility and connecti"ity between parts of the island. $his is tore6uce :eo:ra,/ical immo7ilitso that workers are able to tra"el to different parts of the country towork.

E'aluation!&n small countries like !ingapore' geographical mobility is less of an issue than in manylarger countries especially after the go"ernment had done much to impro"e transport facilities.

olicies to o'ercome :eo:ra,/ical immo7ilit o8 ca,italor capital immobility' go"ernments can perhaps target certain sectors and encourage firms to purchase

capital goods (that they "iew as important) by gi"ing them preferential incenti"es (e.g.' tax cuts' financialhelp).

CONC)USION>ence' the !ingapore go"ernment has implemented appropriate policies to correct mar$et 8ailuresarising from im,er8ect in8ormation an6 immo7ilit o8 8actors o8 ,ro6uction; E"en though thesepolicies may not completely correct the market failures' go"ernment inter"ention in the form of subsidiesS education to correct underconsumption and taxes S campaigns to correcto"erconsumption=production as well as the constant impro"ement to a world class transportationnetwork in !ingapore will definitely reduce the extent of market failure due to imperfect information S


@H


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factor immobility respecti"ely. 3esources are hence allocated more efficiently and the e%uilibrium le"elof output will be mo"ed closer to the socially efficient le"el.

uestion 3! TYS 2011 16onsumers and producers are generally assumed by economists to be moti"ated by self


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from the consumption of goods andser"ices' gi"en their limited disposableincome.

< :ecause their disposable income islimited' consumers are constrained bytheir a$i%ity and -i%%ingness to ay forgoods and ser#ices.

< 6onsumers thus ha"e to make choicessince it is impossible for them toconsume e"erything. 4pportunity costsare thus incurred' because the spendingof disposable income on one type ofgood or ser"ice means that another typeof good or ser"ice has to be forgone.

the sale of goods and ser"ices' gi"en limitedresources and cost constraints.

< :ecause resources ac%uired and owned by

producers are limited' producers ha"e to makechoices since it is impossible for producers toproduce e"erything. 4pportunity costs are alsoincurred because the usage of resources toproduce one type of good or ser"ice means thatthe production of another type of good or ser"icehas to be forgone.

< $herefore' producers need to decide 6&at toProduce' ,o- to Produce and 7or 6&om toProduce' gi"en the consumers a$i%ity and-i%%ingness to ay.

CONC)USION

SUGGESTE ANSWE(S

INT(OUCTION

*ey Aords 6onsumers ha"e unlimited wants' which refer to the desire for e"er higher le"els ofconsumption of goods and ser"ices' be it tangible items (e.g. food' clothes' andhouses) or ser"ices which are intangible acti"ities (e.g. banking' medical ser"ices).>owe"er' this is impossible in reality' as consumers and producers are constrained bylimited resources' also known as scarcity.

Issue S

Approach

2o matter how much resources are a"ailable they are scarce in the sense that they

are not sufficient to meet all wants. &ndi"iduals and societies must then make choicesamong the alternati"e uses so as tomaximise the use of resources to achie"e mostwants.

$he problem with scarcity can be o"ercome (not sol"ed' since scarcity is a permanentproblem) when consumers and producers' each pursuing their own self


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$herefore'consumersha"e to make

choicesregarding whatgoods andser"ices toconsume.

i"en this limited disposable income' each consumer has to decide what goods andser"ices to consume. &t is therefore ine"itable that their second best choice of goodsand ser"ices to consume has to be forgone. $his is also known as opportunity cost.

$herefore' after weighing their first and second best choices' consumers consumeaccording to their ability and willingness to pay. $hese are the two criteria for effecti"edemand. bility to pay has to be backed by sufficient purchasing power' which isderi"ed from limited disposable income. Aillingness to pay depends on the consumerstastes' preferences and degree of necessity for the good or ser"ice.

s a result' some goods and ser"ices are in high demand because consumers ha"ethe highest ability and willingness to pay for these goods and ser"ices. 6onsumers tendto be able and willing to pay a high price for these goods and ser"ices. $he con"erse isalso true.

&n doing so'

consumershope to pursuetheir selft/esis!*rice mechanism will lead to an inefficient allocation of scarce resources in a market economy due to thefollowing reasons (gi"e two possible reasons)

CONC)USION

INT(OUCTIONddress the issue8

*rice mechanism refers to the free market forces of demand and supply from which the markete%uilibrium price and output of goods and ser"ices are determined.

$o allocate scarce resources in the most efficient manner for all goods and ser"ices is to makethe best or optimal use of resources to satisfy consumer wants and needs.

Ahether the price mechanism will always allocate scarce resources in the most efficientmanner for all goods and ser"ices in a market economy depends on the existence of sources ofmarket failure and go"ernment inter"ention.

-OYT/esis8 *rice mechanism is able to allocate scarce resources for all goods and ser"ices in a marketeconomy.

*rices as the signaling and rationing functions to allocate resources8

*rices are used as signaling mechanism to indicate to producers what and how much to produceto satisfy consumer wants.

4n the other hand' the profit


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,o-e#er. t&is is on%y true if consumers -&o #a%ue t&e goods most &ig&%y &a#e t&e a$i%ity to urc&aset&em1 8&ose -&o %ac t&e urc&asing o-er -i%% not &a#e access to t&e goods1 ,ence. t&ere may $e

an ine9uita$%e a%%ocation of resources1

Anti>t/esis8 *rice mechanism will not +A;! allocate scarce resources in the /4!$ efficientmanner for all goods and ser"ices in a market economy= *rice mechanism will lead to an inefficientallocation of scarce resources in a market economy9

9 with the existence of any of the following8(i) *ublic oods(ii) Externalities(iii) &mperfect &nformation(i") /arket ominance

iscuss at least @ sources of market failure abo"e and explain how each leads to inefficient allocationof resources' using diagrams.E"aluation8 Aith go"ernment inter"ention' price mechanism may allocate resources more efficiently.

CONC)USION

Stan68 *rice mechanism will always allocate scarce resources in the most efficient manner when theeconomy is operating under conditions of perfect competition and no presence of externalities. &f anyof these conditions is not met' in a free market' price mechanism would result in an inefficientallocation of resources (Umarket failsU) and there would be a need for the go"ernment to step in tocorrect this market failure and achie"e a better allocation of scarce resources.

uestion Q! TYS 2001

iscuss whether the price system is the best mechanism for the allocation of economic resources.[@#]

A sim,le sc/ematic ,lan!

INT(OUCTION

-OY

$hesis8 *rice mechanism may achie"e efficiency in resource allocation

nti


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desired by consumers in the correct or right %uantities' using the most efficient methods of production.>owe"er' in reality' the mechanism does not always achie"e economic efficiency. $he essay willdiscuss how the price mechanism may not achie"e economic efficiency in resource allocation.

T/esis! E,lain /ow ,rice mec/anism ma ac/ie'e e88icienc in resource allocationemand and supply analysis can illustrate how economic efficiency may be achie"ed "ia pricemechanism in the free market and highlight the conditions necessary for this outcome8

*rice act as a sinalbetween consumers and producers to allocate scarce resources oods and ser"ices are produced according to consumers willingness and ability to buy' thus it

reflected consumers preferences. $hese preferences are transmitted to producersQ who used the most efficient way (least cost) to

produce these goods and ser"ices. *rice mechanism also ensures producti"e efficiency as it assumes the producers will use the

least


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t C!' !/:B!/6. >ence the %uantity of good V produced is socially efficient and social welfare ismaximised. &.e. n allocati"e efficient amount of resources are used to produce the sociallydesirable %uantity of ood V.

Ahy is social welfare maximised at C!J +ets see what happens if %uantity is less or more thanC!. 4ur analysis below is based on the mar:inalist ,rinci,le= also known as Mt/in$in: at t/emar:inL.

t C1' !/:C1 W !/6C1. $hus society "alues an a66itional unit of ood V more than thea66itional cost that will be incurred in its production. nd this is the situation faced for any

%uantity of ood V that is less than C!. >ence' social welfare is not maximiDed and there is roomfor impro"ement in social welfare if the %uantity of ood V is increased until C !. !o at C1' there isunderproduction=consumption of the good.

t C@' !/:C@ X !/6C@. $hus society "alues an a66itionalunit of ood V less than the a66itionalcost that will be incurred in its production. nd this is the situation faced for any %uantity of oodV that is greater than C!. >ence' social welfare is not maximiDed and there is room forimpro"ement in social welfare if the %uantity of ood V is decreased until C!. !o at C1' there iso"erproduction=consumption of the good.

$hus' social welfare will be maximised when output is at the socially optimal le"el C ! where !/: B!/6. t C!' there will be no more under


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Aill go"ernment inter"ention necessarily lead to a more efficient outcomeJ Ahat about possible go"ernment failuresJ

Conclusion

*nowle6:e= A,,lication= Un6erstan6in: an6 Analsis

)

13 # 21

or a comprehensi"e and detailed analysis of the role of price mechanism in achie"ing efficientresource allocation. $he answer illustrates an ability to recognise the underlying assumptions andconditions for efficiency to be achie"ed. $he answer includes a sound conclusion based on economicanalysis.

)2

10 # 14

or an unde"eloped explanation that explains the concepts of efficiency and=or inefficiency.43 an answer that explains the role of price mechanism in terms of resource allocation withoutreference to efficiency.

)1

1 # R

or an answer that shows some knowledge of concepts of efficiency' and= or price mechanismwithout explanation. nswer contains se"eral conceptual errors.

E'aluationE2

# 4

or an e"aluati"e assessment based on economic analysis or empirical e"idence.

E1

1 # 2

or an e"aluati"e not supported by analysis.

Section ! Case Stu6 ractice

NOTE WHI)E ATTE"TING A CASE STUY!

$ake note of the /ea6in:so8 t/e etractsas they may drop some hints to the co"erage.

s you read through the passages' HIGH)IGHT $e ,oints inclu6in: statisticsas you most likelyneed to %uote some of them in the answers and lin$ t/e ,assa:es to economics conce,ts.

;ou ha"e to scrutini9e ?Note t/e ear?s@= units= aes an6 etc) t/e c/arts= 8i:ures an6 ta7les ?i8an@;

(ea6 t/rou:/ all t/e .uestions 7e8ore start attem,tin:.

You /a'e to ma$e some 8orm o8 re8erence to A)) THE TA-)ES D CHA(TS D %IGU(ES D

ET(ACTS in t/e 6ata. &n other words' if you did not use info from a particular table=chart=figure=extract inthe case study at all' it will mean you ha"e left out some important information and that will lead to losing ofsome marks. (3efer to 6ase !tudy !kills package)

uestion 1 # 2011 HCI H1 Economics relims

T/e "ar$et 8or Oli'e Oil

Etract 1! T/e e,an6in: oli'e oil mar$et

sthe world begins to explore alternati"e uses of "egetable oils' especially those that held promisesto be rede"eloped as :iodieselF' oli"e oil has been spared from this oil hungry world. &n anunexpected spin


35/53



would be further increases in the price of the oli"e oil that is widely used in 5- for frying and as asalad dressing since reece is the worldUs third


36/53



!oil erosion is cited in numerous publications as one of the principal en"ironmental problemsassociated with oli"e farming in /editerranean regions. !oil erosion has "arious en"ironmentalimpacts' notably the loss of producti"e capacity' leading to the need for increased external inputs and

ultimately to desertification. own


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the intensi"e exploitation of the land through the continuous tillage or spraying of residual herbicidesto control weeds that had caused an impo"erishment of the soil.

!ource8 dapted from 8&e En#ironmenta% "mact of "rrigation in t&e E;' @00R

uestions

?a@ ?i@ escribe the trend in the world price of oli"e oil between @001 and @010. [@]?ii@ ccount for the abo"e trend. [H]

?7@ Explain the likely impact of the Euro


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?7@ E,lain t/e li$el im,act o8 t/e Euro>9one conta:ion on re'enue 8rom t/e e,ort o8 oli'eoil to Asian mar$ets; 4B

Export re"enue for 4li"e 4il is likely to %A));Explain using economic analysis8(1) *x rise (figure 1 and extract 1)' demand is most likely price elasticin sian /arkets.

AhyJ&t is a newF market. $herefore demand unlikely to be price inelastic as sians ha"e notyet ac%uired the same kind of dependence on 4li"e 4il as the /editerranean region.5nlike in the /editerranean' it is 24$ an important ingredientF in sian diet or cooking[Extract 1]. &t is mainly use for health reasons e.g. anti


39/53



Explain with reference to diagram8o *ositi"e externalityo */6 B cost of production of the producers of oli"e oilo */: B satisfaction or utility deri"ed from consumption of oli"e oil use in cooking and

"alued for its health benefitso E/: B spillo"er health mperfect info seems to be the more ob)iousanswer here than positi)e e(ternalities. f imperfect info/ diaram needed?

"ar$ers Comment!

Stu6ents are not a7le to 6raw t/e 6ia:ram correctl;

Aes are not well la7ele6;

ia:ram is not well e,laine6

Eam,les are not well illustrate6;

?ii@ ,ro6uction o8 oli'e oil; Q

%i:ure 2! Eternal cost in ,ro6uction in Oli'e Oil "ar$et

Explain with reference to diagram8o 2egati"e externalitieso */6 B cost of production borne by producers of oli"e oilo */: B satisfaction or utility deri"ed from consumption of oli"e oil use in cooking and


,R

Quantity

SMB = PMB + EMB

C!Cm

"-

Price

Quantity


SMC = PMC + EMC

C

B

C! Cm

"C

E"Cat Cm*s

*m


40/53



"alued for its health benefitso E/6 B en"ironmental issues mentioned in the data8

!oil erosion leading to desertification

Aater pollution from use of fertilisers=pesticides' contaminating drinkingwater.

o /arket failure BW &nefficient allocation leading to A+ due to o)erproductionbecauseof di"ergence between pri"ate and social costs

"ar$ers Comment!

Con8usion 7etween consum,tion an6 ,ro6uction o8 oli'e oil;

Aw8ull 6ia:rams

Eam,les are not well illustrate6;

?6@ E'aluate t/e measures ,ro,ose6 7 t/e EU mem7er states to control en'ironmental

6e:ra6ation 6ue to oli'e 8armin:; K

*olicies used 8 +egal regulation (the appropriate financial penalties for not obeying the legal

en"ironmental re%uirementsF) !ubsidy(a receipt of support payments for its en"ironmental friendly productionF)

1) Explanation of Su7si6ies8# iagram to explain how subsidies work

%i:ure ! Su7si6ies in Oli'e Oil "ar$et

subsidy will help lower the cost of production for the en"ironmentally friendly method. $his willshifts the supply cur"e downwards. $hus more oli"es can be produced using the en"ironmentallyfriendly method.7 reducing E/6 due to production of oli"eJ 7 ap between Cm and Cs narrowsJ


H0

P%

& $&

P

P1

&&

*rice

Cuantity

!!1

&&1

Q1

Q


41/53



E"aluation 8o it would be difficult to "alue the gains ob?ecti"elyF. $hus it will be difficult to ha"e

subsidy on a case by case basis.o $he data suggest that the most harmful method of farming comes from highlyowe"er' if the farmers deem that the yield and gains from themechaniDed method will be much more than the subsidy' they may still stick to theen"ironmentally harmful method of farming oli"es.

*ossible change8E5 may ?ust subsidiDe the low


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$he imposition of the tax results in an output that corresponds to the socially efficient le"el of

output' C!E.

lso' if the tax is seen as payment for the use of the en"ironment' there may be incenti"es toreduce soil erosion.

$he imposition of the fee mo"es the e%uilibrium to the socially efficient le"el where !/6 B!/: because when the firm attempts to maximiDe profit now and produce at where*/:B*/61' the outcome will be C!Ewhich will be the socially efficient outcome.

E"aluation8o mt of green tax needs to be determine accuratelyo emand might be price inelastic which would mean the tax would ha"e to be "ery high'

causing political dissatisfaction

6onclusion84n the one hand the consumption of 4li"e oil generates *E e.g. health benefits whilst on theother the production of 4li"e 4il generates 2E. "iD en"ironmental degradation. $hus' policiesshould not be aimed at discouraging consumption but encouraging the use of en"ironmentallyfriendly techni%ues or green technology to produce oli"e oil.

3egulations are at best a short term stop gap measure. +ong term sustainable policies should

pro"ide incenti"e for oli"e producers to adopt green techni%ues of farmingF by making thetechnology a"ailable and relati"ely cheap.

concerted effort by member states is re%uired. lso need to engage other oli"e oil producingeconomies as well to holistically target the problem.

+e"el escriptors+,#


43/53


44/53



uestion 2 # 200K "JC H1 Economics relims

T/e rice o8 Growt/

Etract 1! Tac$lin: t/e ,ollution ,ro7lem

ccording to the Aorld :ank' 6hina has 1I of the worldUs @0 most polluted cities. Estimates suggestthat ,00'000 people a year die prematurely from respiratory diseases. $he main reason is that aroundM0Z of 6hinaUs mushrooming energy needs are supplied by coal


45/53



the o"erall comparati"e economic ad"antage that determines where the international flow of talentand in"estment goes. or example' the inancial $imes reported earlier this month that >ong-ongs worsening air pollution is prompting managers of some ma?or hedge and asset funds to mo"e

to !ingapore' reflecting a trend that could undermine the territorys status as a regional financial hubwhile enhancing the competiti"e position of !ingapore.

!ingapore has imposed tough "ehicle fuel emission standards and regulations to limit industrialpollution. $he go"ernment has also made it expensi"e to own pri"ate cars while offering alternati"epublic transport' including pollution


46/53



uestions

?a@ ?i@ Aith reference to igure 1' describe the trend of global carbon dioxide emissionsfrom fossil burning o"er the stated period.

[@]

?ii@ !uggest possible reasons for the trend obser"ed. [,]

?7@ $o what extent does $able 1 support the "iew that higher growth results in greater

pollutionJ

[,]

?c@ ?i@ Aith the aid of a diagram' explain the market failure in 6hina based on Extract 1. [H]

?ii@ ssess the need for the 6hinese go"ernment to change its current policy to bringabout cleaner air.

[P]

?6@ Aith the help of the data gi"en' discuss the possible impact of a reduction of carbondioxide emissions upon an economy.

[10]

Total! 0mar$sB


HI


47/53



?a@ ?i@ Wit/ re8erence to %i:ure 1= 6escri7e t/e tren6 o8 :lo7al car7on 6ioi6eemissions 8rom 8ossil 7urnin: o'er t/e state6 ,erio6;

2B

Increasing throughout [1m]; increasing at an increasing rate after 1950 [1m].

?ii@ Su::est ,ossi7le reasons 8or t/e tren6 o7ser'e6; B

Increase in global economic growthafter 1950s resulted in increased income

levels, thus allowing people to consume more energy-consuming goods e.g.

electrical appliancesrise in CO2 emission.

Rapid industrializationespecially post of the 50s or increased levels of

industrial production implies that factories may be using more energy to drive

their production

more harmful pollutants released into the air

rise in CO2emissions.

Increase in global populationmay result in more electricity consumption

more fossil fuel burnt to generate electricityrise in CO2 emissions

Any other logical reasons

?7@ To w/at etent 6oes Ta7le 1 su,,ort t/e 'iew t/at /i:/er :rowt/ results in :reater,ollutionP

B

>igher growth>igher pollution. >ow trueJ

Yes(*ositi"ecorrelation withreference to $able1)

C/ina & In6ia (top @ in terms of growth) < also top @ in termsof 64@ emissions.

4n the other hand' Ja,an (bottom in terms of both growthand 64@ emissions)

Ece,tions! 6omparing the , countries with low growth (same econgrowth rate of 1.PZ < 'arie6 correlation8

o E5s 64@emission is lowest (0.@Z).

o 5!Us 64@emission is relati"ely high (1.@Z). 2otable ece,tion' 5-Us growth rate is higher than 1.PZ but

an emission is negati"e

?c@ ?i@ Aith the aid of a diagram' explain the market failure in 6hina based on Extract 1. [H]

Recognize that pollution caused by factories is a form ofnegative externalities in

production[1m] which are often ignored(define)


HM


48/53



Support with e.gs / evidence[1m]:E"idence from Ext 1' para @ < @imact oncros of acid rain. medica% $i%%s. %ost -or from i%%ness. money sent on disasterre%ief fo%%o-ing f%oods and t&e im%ied costs of resource de%etion1 di"ergence

between social S pri"ate costs (!/6 W */6)

%i:ure 1! Eternal cost 8rom 8actor ,ro6uction

ssuming perfect competition' mar$et e.uili7rium %uantity of steel is m=where "- "C= as consumers and producers only consider their ownbenefits and costs.

>owe"er the sociall e88icient %uantity of production should be at S where

S"-S"C' where the full costs and benefits and costs to society areconsidered. C!is less than the market e%uilibrium %uantity' Cm. where */: B*/6. $hus there is o'er,ro6uctionby factories by the %uantity Cm7 C!

rea CmC!:6 is the total social cost incurred for the o"erproduction Cm7 C!.

rea CmC!: is the total social benefit gained for the o"erproduction Cm7 C!.

!ince total social costs incurred exceeds the total social benefits gained for

o"erproduction Cm 7 C!' area :6 represents the 6ea6wei:/t wel8are lossdue to o"erproduction of C!7 Cm.

?ii@ Assess t/e nee6 8or t/e C/inese :o'ernment to c/an:e its current ,olic to7rin: a7out cleaner air;

KB

Intro: Highlight the reason why the Chinese government intervenes Improve

efficiency resulting from market failure.

Identify policy that SEPA have been put in place:Legislation rules and

regulations put in place by government to ensure compliance.


HP

Quantity

Price


C! Cm

C

B

SMC = PMC + EMC

"C

*m

*s

E"Cat m


49/53



Explain how legislation works to bring about cleaner air in China

From Extract 1, SEPA's branches, known as Environmental Protection Bureaus, are

supposed to monitor pollution, enforce standards and collect fines. Chinas

approach is to enforce standards in hope of reducing the pollution levels with the

threat of penalties such as fines.

The government draws up legislations, puts in place measures to ensure

compliance; and take law breakers to task. The fear of being penalized / fined would

reduce the pollution level by reducing energy usage to socially optimal.

Evaluate the efectiveness o Legislation

Extract 1 states that the penalties remain laughably light

amount of fine or

penalty imposed is too low to have any effect, rendering the policy largely ineffective

in reducing Qm to socially optimal.

Presence of government failure in China as seen from the bureaucratic nature &

difficulties & inability in enforcing such standards on a huge country e.g. priorities of

local govt to maintain employment and growth which may conflict with SEPAs

objective in reducing pollution / imperfect information as seen from the lack of

cooperation and no sharing of patchy data / government is reluctant to impose price

rises due to fear of public unrest.

Lack of government and peoples understanding of polluters pay principle,

rendering such rules to be a flop due to weak enforcement e.g. refund of fines to

firms in the form of tax breaks

Justiy the need or China to change its current policy:

Not necessary to change current policy Legislation may still work. Improvements

needed to enhance effectiveness:

By increasing the penalties and ensure that it is strictly adhered to.

However, to ensure that the restrictions are enforced, much monitoring needs to be

done and this might pose to be a huge burden on the government. Given the large

population size and land mass of China, this will lead to a substantial amount

resources being utilized to solve the problem.

There is a need to change the current policy as it is ineffective and refining the


HR


50/53



policy may not work:

Suggest one other policy China can adopt to bring about cleaner air:

Brief%y e%ain ta or any ot&er re%e#ant o%icies 3 %ie trada$%e ermits /

imro#ing efficiency of u$%ic transort system1

%i:ure 2! Ta to internalise E"C 8rom 8actor ,ro6uction

$he go"ernment might impose an indirect tax on producers corresponding to the

external marginal cost i.e. $axBE/6 at S(distance :) on each unit of steel.$his shifts the */6 upwards so that the new */6' which e%uals */6 G tax'coincides with the !/6 at C!.

>ence' the new market e%uilibrium %uantity where */: B */6 G tax' now

coincides with the sociall e88icient%uantity C!' where !/: B !/6. &f the tax accurately reflects the external marginal cost' producers are now in

effect paying for the use of the en"ironment as the price they are recei"ing isnow lower at *!7 t' compared to *mbefore the tax. $he externality has thenbeen internalise6 or ,rice6 in.

Synthesis !easoned "udg#ent$

Looking at the contribution China is making to world pollution (China has 16 of the


#0

Price

Quantity


SMC = PMC + EMC

C

B

C!

Cm

"C

A E"Cat

s

Ta

0

*s

*m

*!< t

"C F ta


51/53



world's 20 most polluted cities), the current policy adopted are probably insufficient

and ineffective to a large extent.

Just as suggested in Extract 1 of the hopes for super-green cars, there is a need

for China to look into long term solutions for the country. For example, just as how

some of the Asian economies have been responding, China could consider a more

efficient public transport system in light of the growing income level. (Eg. In Extract

2). The process however would be a difficult one given the nature of Chinas

economy which is one of a huge population and vast rural-urban divide.

?6@ Wit/ t/e /el, o8 t/e 6ata :i'en= 6iscuss t/e ,ossi7le im,act o8 a re6uction o8car7on 6ioi6e emissions u,on an econom;

10B


#1


52/53



Introduction:

The macro-goals of any government would be to achieve both internal goals, i.e.

sustained growth, low inflation, low unemployment, and external goals, i.e. healthyBOP.

Carbon dioxide emissions cause environmental degradation and will have adverse

effect on the economy. To some extent, a reduction of carbon emissions will benefit

the economy.

The reduction in CO2 emission will impact an economy differently in short term and

long term.

S/ort run im,act on t/e econom!

1.Slowdown economic growthTo reduce CO2 emissionsgovt need to impose measures to reduce energy usage /

reduce fossil-fuel burning

measures imposed on businesses may raise

production cost (e.g. compulsory installment of pollution abatement equipment, pollution

tax etc.)

fall in SRAS

slow down economic growth

2.Rise in unemployment

Slowdown in growth

firms cut back on production

dd for labour falls

rise in

unemployment

3.Rise in inflation

Rise in firms cost of productionfall in SRASfirms pass on the higher cost to

consumerscost-push inflation (Illustrate with AD-AS diagram)

4.Worsen BOP

Rise in cost of production due to measures undertaken to reduce CO2 emission

domestic gds become less competitive in international market

export revenue falls

(assuming PEDx > 1)current account worsens

)on: run im,act on t/e econom

1.Boosts economic growth & improve SOL

Pollution-free environment attracts foreign direct investment (FDI) and foreign talents

to an economy. Evidence: Hong Kong vs Singapore in Ext 2. Hong Kongs worsening

pollution has discouraged foreigners to do business there.

Ext 1, para 2: pollution is costing China an annual 8-12% of its $1.4 trillion GDP in

direct damage. Reduction in CO2 emission will increase NI. (Illustrate with AD-AS

diagram with economic analysis)


#@


53/53



Improvement in SOL (non-material) with less health problems etc. as quality of air

improves

2.Reduces unemployment

With an increase in FDI, the increase in productive activities would help create jobs

for the people, therefore reducing unemployment

Particular sectors such as the tourism sector will stand to benefit more as clean air

would attract more tourist, thus increase in employment in the tourism sector

4.Effect on BOP

Attraction of FDI to an economy with lower carbon dioxide emissioninflow of

money under the capital accountthus BOP improves.

In the longer term, money will flow out under the current account when the FDItransfer earnings back to their own country, thus worsen BOP

Snt/esisDConclusion # istinction 7etween two t,es o8 econom #(elati'eloor 'ersus (ic/ 6e'elo,e6 countries;

4n balance' whether benefits outweigh costs of reducing 64@ emissions depend oncountrys stage of economic de"elopment. &n general' emerging=de"eloping economieswill probably incur a much higher trade

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