(2023) A Level H1 Econs CSQ 1 Suggested Answers
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a. In general, both China, as well as Germany and the UK, saw positive net additions to offshore wind energy capacity from 2017 to 2021.
The net additions to offshore wind energy capacity increased from 2017 to 2021 while the net additions decreased in general for Germany and the UK.
While both the UK and China saw positive net increases in all years, Germany had zero net additions in 2021.
b. A public good has the characteristics of non-excludability, non-rivalry and non-rejectability in consumption.
Renewable solar energy produced in Singapore would be excludable - you would have to pay for a solar panel to be able to derive the benefits from generation of renewable energy source.
Renewable solar energy produced in Singapore would also be rivalrous in consumption - a unit of renewable solar energy used by one individual (for any use) will reduce a unit available for the next user.
Renewable solar energy is also rejectable - a user can choose to opt for non-renewable energy sources to power their homes / any use as opposed to using solar energy. (You can choose not to install a solar panel)
ci. A positive externality is a benefit conferred to a third party not directly involved in the production or consumption of the good.
As the solar farm provides an equivalent of taking 7000 cards off the roads, air quality in Singapore will improve.
Citizens in Singapore may enjoy better air quality, and consequently, better health.
Note: Identify a possible benefit to a third party
cii. Individuals, in consumption solar energy, would only consider their marginal private costs (e.g. cost of purchasing solar energy) and their marginal private benefits (savings from using solar energy instead of electricity from the power grid).
This fails to take into consideration the external benefits associated with the consumption of solar energy - Improvement of air quality in Singapore since there will be reduced usage of energy generated using fossil fuels →Citizens in Singapore may enjoy better air quality, and consequently, better health.
As such, individuals will consume at Qm where MPC = MPB.
MSB = MPB + MEB
The presence of positive externalities (MEB), thus causes MSB to be higher than MPB.
The socially optimal level of consumption should thus be at Qs where MSC = MSB.
Since individuals will only consume at Qm rather than Qs, underconsumption will occur.
Show underconsumption on diagram
d.
Before the authorisation of a price increase
The government intervenes in the energy market via a maximum price as mentioned in Extract 3.
A maximum price is only effective when set to be below the equilibrium price.
Without government intervention, the market equilibrium price and quantity should be at Pe and Qe.
With a maximum price imposed at Pmax, there will be a shortage of Q0-Q3 which we expect that the government will subsidise to bridge the shortage (its sensible to expect this because - what is the alternative? We use logic - it cannot be the case that households are left without power due to a shortage as a result of government’s implementation of a maximum price)
Consumers will thus consume at Q3
Consumer expenditure would be Pmax * Q3
After the authorisation of a price increase
The maximum price will now increase from Pmax to Pmax1
With a maximum price imposed at Pmax1, there will be a shortage of Q1-Q2 which we expect that the government will subsidise to bridge the shortage
Consumers till thus now, consume at Q2.
Consumer expenditure will increase from the original Pmax * Q3 to Pmax1 * Q2
e.
Increase in demand
It is mentioned in Extract 4, that there is growth in demand for energy (and most of it is for renewable energy such as solar energy)
Therefore, we can assume that demand for solar energy is increasing
(Not necessary to speculate the non-price factors of demand here, although you can cite possibly, size of market, income or changes in tastes and preferences if you would like to)
Decrease in supply
The change in government subsidies here refers to removal of subsidies for new solar power stations
This will result in decrease in supply from SS0 to SS1
Comment
To determine the overall impact on the market for solar energy, we will need to determine whether the increase in demand > decrease in supply or the decrease in supply > increase in demand
I would say that technological advancements and increasing economies of scale would result in an increase in supply for solar energy over the years (due to reduced cost of production) - this should partially mitigate the fall in supply due to reduced government subsidies (potentially why the government has also weighed this and decided to go ahead with removing subsidies).
I would thus say that the increase in demand would likely be greater than the decrease in supply.
Thus price and output should both increase, with total increased expenditure on solar energy.
f. Effects on energy consumers
Energy consumers have an inelastic demand. When prices increase, they will reduce their quantity demanded less than proportionately.
They will have to pay more for their energy bills
Correspondingly, assuming no income changes, they will have less available to spend on other goods and services.
Energy consumers may thus now seek alternatives (substitutes like installing solar panels in their own homes - price of related goods) → increasing their demand for alternative energy sources such as solar panels
Effects on energy producers
As prices increase, quantity demanded will fall more than proportionately. Total revenue will go up for energy producers.
This should increase profitability, and encourage energy companies to invest more in infrastructure, renewable energy sources, or more efficient energy production methods.
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