13 Economics — Test Four: Eco3.3 (and some 3.1)
ASSESSMENT SCHEDULE
QUESTION ONE: EXTERNALITIES
1.
2.
Marker’s
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Pure private goods have no externalities. List TWO further characteristics of private goods.
(1)
Non-rival/non-depletable
(2)
Non-excludable (by price)
A1
For each type of externality in List 1, identify an example from List 2. Enter the correct letter
into the appropriate box.
List 1
List 2
(a)
Negative Externality of
Production
(b)
Positive Externality of
Production
H
A. Car dealers benefiting from other car dealers
locating nearby
B. Drinking a can of soft drink
A
C. Eating a Sandwich
D. Employing an extra worker
(c)
(d)
Negative Externality of
Consumption
F
Positive Externality of
Consumption
E
E. Car parks being made available because
more people are taking public transport
¾
A1
F. Passive smoking
G. Production of fireworks
H. Water pollution from a factory
3.
What does it mean to ‘internalise an externality’?
Whoever creates the externality pays or is rewarded
Bringing together the social costs and benefits
4.
A2
How would establishing appropriate property rights help to control the over-fishing of New
Zealand’s coastal shellfish beds.
Eg:
the allocation of quotas to establish property rights and limit catches
M1
QUESTION TWO: PUBLIC GOODS
There are 13 national parks in New Zealand which are administered by the Department of
Conservation.
1.
2.
Marker’s
use only
State TWO reasons why a national park might be considered a public good.
(1)
Non-excludable by price
(2)
Either
A3
and
non-depletable, non-rival, no marginal cost
Define a collective good.
A good provided by government and/or funded from taxation
A1
3.
In what way could international tourists visiting New Zealand’s national parks be considered
‘free-riders’?
The idea that they are not contributing toward the cost
A1
Graph 1: Benefit Received from Visiting a National Park
Capacity
Costs
and
Benefits
MB
price
Visitors
4.
Assume that the marginal cost of an extra visitor to a national park is zero.
a. On Graph 1 above, show and label appropriately the effect of charging an entrance fee to
a national park.
Price and DWL indicated on graph
A3
b. Explain why it might be considered economically inappropriate to charge an entrance fee
to a national park.
Any of the following ideas:
welfare loss when benefit Is denied despite zero marginal cost / consumer benefit is not being max’ed /
there is no need to ration this resource / costs of gaining revenue might exceed revenue gained
M1
QUESTION THREE: INCOME DISTRIBUTION
1.
Marker’s
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Distinguish between equity and equality of income distribution.
Equity = fairness
Equality = same
A1
Table 1: New Zealand Household Incomes, 2002/3
2.
a.
% of
Households
% of Income
Cumulative %
of Households
Cumulative %
of Income
20
5
20
5
20
11
40
16
20
15
60
31
20
23
80
54
20
46
100
100
all
A1
Complete the last column of Table 1.
b. Use Table 1 to plot New Zealand’s Lorenz Curve (label it L1) on the grid below. Fully
label the graph.
L1
% Income



Labels
Scales
Plotting
A1
% Households
c. The government has increased the top marginal tax rate from 33% to 39%. Show on the
graph above the effect of an increase in the overall tax rate. Label it appropriately.
A sketched and labeled curve between L1 and the 45 o line
3.
A3
State what the diagonal line on the graph indicates and explain its significance in displaying
equitable income distribution.
Equal distribution of income, providing a means of comparison if more equal equates with more equitable
A1
QUESTION FOUR: ECONOMIC ANALYSIS
Marker’s
use only
Toll Holdings owns New Zealand’s only rail operation. It has three main areas of interest:
 rail freight
 rail passenger services, including commuter rail passengers in Wellington
 the inter-island ferries, which carry both freight and passengers.
The company owns 3,904 kilometres of railway track. In 2003, Toll carried 14.7 million tones of
freight, provided around 12 million passenger trips and made a profit of $42 million.
Source: Toll Holdings website
Part A: Rail Freight
Graph 2: A Monopolist
Revenue/
Costs
MC
AC
Pm
Ppc
AR
Qm
1.
Qpc
MR
Output
Graph 2 illustrates the cost and revenue curves a monopolist may experience.
a. Explain why the average revenue curve is horizontal for a perfect competitor but slopes
downwards for a monopolist.
A perfect competitor is a price taker so must accept market price
As the monopolist is the sole supplier, their demand curve is the market demand curve, they can only
increase quantity sold by reducing price
A4
b. Explain why a monopolist is able to set rather market price or market quantity, but not
both.
Consumer determine demand, not producers
A4
Marker’s
use only
c. On Graph 2:
(i) Label the curves
(ii) Identify and label the quantity (Qm) and price (Pm) at which a monopolist will produce
A4
(iii) Identify and label the equilibrium quantity (Qpc) and price (Ppc) that would occur if the
market was perfectly competitive
(iv) Shade and label the deadweight loss (DWL) that results from the market being
supplied by a monopolist, rather than perfect competitors
A4
d. In Graph 2, the monopolist is making a supernormal profit at monopoly equilibrium.
A4
(i) Shade and label the supernormal profit.
(ii) Explain why a monopolist is able to make a supernormal profit in the long run.
Barriers to entry prevent other firms entering the market, increasing supply and therefore driving
M4
priced down
e. Other than deadweight loss, state why it might be undesirable to have rail freight provided
by a monopolist.
A4
Higher prices / poor service / essential service in control of a single firm
f.
Outline ONE way in which the government could intervene in the rail freight industry to
increase efficiency.
Setting prices by regulation (P=MC or P=AC) / setting a maximum price below current market price /
M4
provision of subsidies / state-owned competitor / break-up of monopoly
g. State ONE likely argument that Toll Holdings could offer as to why it is not a monopolist.
Close substitutes exist (trucking forms, couriers, buses)
M4
3 x M4
E4
Graph 3: A Monopolist
Marker’s
use only
Revenue/
Costs
AC
MC
Ps
AR
Qs
Output
MR
2.
Graph 3 illustrates the cost and revenue curves a natural monopolist may experience. Toll
Holdings could be described as a natural monopoly.
a. Identify the feature in Graph 3 that is typical only of a natural monopoly.
Falling average costs over the relevant range of output
A3
b. Explain why this feature often occurs with networks such as railway lines.
High initial costs / spreading of fixed costs
c. (i) On Graph 3, identify and label the socially desirable quantity (Qs) and price (Ps).
A1
A2
(ii) Explain why the firm is unlikely to produce at this position.
The firm is not maximizing its profit / making a sub-normal profit
M1
Toll Holdings also provides commuter rail services in Wellington and Connex operates
Marker’s
use only
commuter services in Auckland, giving rail access between these cities and their suburbs. All
together, commuter trains carry more than 10 million passengers a year.
3.
Give TWO examples of a positive externality of consumption that may arise from the use of
commuter trains in a major city.
(1)
Fewer traffic jams / less pollution / fewer accidents / lass need for motorway extensions
A3
(2)
Graph 4: Positive Externalities Associated with Commuter Trains
Costs
and
Benefits
MC
Ps
MSB
MB
Qs
4.
5.
Output
On Graph 4:
a. show and appropriately label the effect of a positive externality of consumption
A3
b. label the social equilibrium quantity (Qs) and the social equilibrium price (Ps)
M1
c. identify and label the subsidy that must be paid to fully internalize the positive externality.
M3
In both Auckland and Wellington, a subsidy is paid by the Regional Council to lower the price
of train fares to encourage more people to ‘take the train’. The subsidies are paid from the
rates collected by local government from the residents and the businesses in the area. Explain
why this could be considered equitable.
Either: the benefits of the subsidy will only be enjoyed by residents of Auck and Wgtn so it is equitable
to fund it from rates collected in those two areas instead of from taxes on the whole country
Or:
the benefits of travel by commuter train will be enjoyed by all residents in the area, so they should
all contribute through their rates
E1
For Assessor’s Use only
Achievement Criteria
Achievement
Merit
Excellence
AS3.3
Define market failure and
describe its characteristics.
5 x A1 or better
Explain the effect of
government intervention on
resource allocation.
2 x M1 or better
Comprehensively analyse the
effectiveness of government
intervention on resource
allocation.
1 x E1
Describe appropriate methods
that the government can use
to compensate for market
failure.
2 x A2 or better
Illustrate market failure and
government intervention.
Overall Level of Performance (all criteria within a column are met)
3 x A3 or better
AS3.1
Use marginal analysis to
derive the demand and supply
curves and to describe the
behaviour of firms in different
market situations
4 x A4 or better
Use marginal analysis to
explain changes in output and
pricing decisions.
2 x M4 or better
Note: only the grade for 3.3 is recorded.
Comprehensively apply
marginal analysis.
1 x E4