Econ AS Paper 1 2022

1 (a) What are the characteristics of a private good?                                                                                    (1)

C – Rivalrous and excludable

b) Explain why flood defences such as those in the Calder Valley are usually provided by the public sector.  (3)

Bc they are public goods.

• non-excludable - people cannot be prevented from benefiting from them.

• non-rival - 1 person’s use does not reduce availability for others.

Free rider problem occurs if left to individuals, where some may refuse to pay but still benefit —> so private provision would be insufficient.

E.G. Govt. invested £74 million in flood defences in the Calder Valley to protect residents who might not contribute voluntarily.

2 (a) Define the term ‘minimum price’.                                                                                                                      (1)

Lowest price that can legally be charged for a good or service; acts as a price floor below which the price cannot fall.

(b) In achieving a price of P2 , the amount spent on intervention buying by the EU

would be                                                                                                                                                                                                 (1)

B - JHQ2Q3

(c) Explain one likely problem for the EU of maintaining prices at P2 .                                          (2)

Creates a surplus of the good.

Bc supply exceeds demand at this higher price.

This surplus may need to be stored or purchased by the govt., which incurs extra costs and may require higher taxes.

3 (a) Which one of the following would be most likely to cause a country’s currency to

no longer be acceptable as a medium of exchange?                                                                                    (1)

B - It becomes unlimited in supply

(b) Explain how Bitcoin fulfils one function of money, apart from as a medium

of exchange.                                                                                                                                                                                       (3)

Bitcoin can function as a store of value.

E.G. When an individual saves Bitcoin, they are confident that it will retain value over time.

So they can later use the same amount of Bitcoin to make purchases or exchanges.

4 (a) With reference to the statement above, explain the difference between positive

and normative statements.                                                                                                                                                  (3)

PS - based on facts and can be tested or verified.

NS - contains a value judgement and cannot be proven.

E.G. Statement - the word “should” makes it normative, as it expresses an opinion about what ought to happen

BUT, the idea that unvaccinated people benefit when others are vaccinated is a positive statement, because it can be supported with evidence showing the effect of herd immunity

(b) Which one of the following explains how market failure might occur in a free

market economy?                                                                                                                                                                          (1)

C - Goods with positive externalities are underprovided

5 (a) Explain one reason why flour producers might find it difficult to increase quantity supplied in the short run.                                                                                             (3)

Bc supply is price inelastic.

They cannot respond immediately to a price increase.

E.G. wheat takes time to grow and cannot be processed into flour instantly. So, even if prices rise, the quantity of flour available increases only slightly.

(b) A manufacturer has estimated that the price elasticity of supply of ice cream is +1.5.

If the demand for ice cream rises and the price increases by 10%, which one of the

following is the resulting percentage change in supply?                                               (1)

 

D - 15%

6 (a) Explain the likely impact of the new 2020 TACs on the price of cod. Include a supply and demand diagram in your answer.                                                                 (5)

The new 2020 Total Allowable Catches (TACs) are likely to reduce the supply of cod.

Because the catch limits have been cut by 50% in areas such as the Celtic Sea, Irish Sea, and west of Scotland

E.G. According to Figure 1, … was previously overfishing by … tonnes, so the new limits will reduce the quantity they can supply .

A reduction in supply shifts the supply curve leftwards, leading to a higher equilibrium price for cod, assuming demand remains unchanged.

(b) Assess whether it is rational for fishing companies to behave in this way. (10)

• Rational to fish as much as possible from perspective of a fishing company.

• Aim to maximise profits and revenue is directly linked to size of their catch.

• E.G. Figure 1 shows that Sweden is fishing 52.4% above its TAC —> suggests firms exploit available opportunities to increase revenue.

• By using techniques to increase catch size, firms can minimise costs per unit.

• Individual firms benefits by generating profit, while negative effects of overfishing are spread across society, not just the firm.

• BUT, behaviour may be irrational in the long run.

• Overfishing is unsustainable and can lead to the depletion of fish stocks - the “tragedy of the commons”.

• Short-term profit maximisation reduces the stock of fish, meaning firms may lose their revenue base in the future.

• Studies suggest that 90% of fish stocks are depleted, highlighting the long-term risk to firms themselves

• Overfishing creates negative externalities, harming society as a whole, so what is rational for an individual firm can be socially harmful.

Conclusion:
It is rational in the short term for firms to fish as much as possible to maximise profit, but irrational in the long term, as overexploitation reduces future profits and damages society.

(c) With reference to the information provided and your own knowledge, explain

two characteristics of private ownership in a free market economy.                           (6)

Excludability.

• Private owners can charge for the use of their assets, controlling who can access them.

• E.G. Extract B states that “private producers will act in their own self-interest”, seeking to maximise profit by controlling access to resources.

Rivalry.

• Resources owned privately ( and, labour, or capital) can only be used by 1 person or firm at a time, and owners can buy and sell them to generate profit.

• Private ownership makes individuals accountable for their resources, because ownership gives legal rights to prevent others from using them without permission,

(d) With reference to the information provided, calculate the new quantity

demanded of bags of chips from fish and chip shops, following a 2% increase in

the price of fish. You are advised to show your working.

(4)

XED = % change in quantity demanded of Good A / % change in price of Good B

-8 = ? / 2%

? = -8 × 2% = -16%

950,000 × 16% = 152,000 fewer bags of chips

950,000 - 152,000 = 798,000 bags of chips per day

(e) Discuss the likely impacts on an economy of specialising in the fishing industry.

Use a production possibility frontier diagram in your answer.

(15)

Knowledge (3)

• Specialisation: economy/region focuses on goods/services with comparative advantage.

• Example: Scotland → over half of UK fishing industry workers.

• Benefits: develops expertise, improves efficiency via division of labour, focuses skills & training.

Application (3)

• Scotland: specialised fishing ports & fleets → infrastructure for domestic & international trade.

• Trade with other countries generates income.

• Employment ↑; skilled labour & resources efficiently used.

Analysis (3)

• Increases output & productivity → workers more proficient; capital used efficiently.

• On PPF diagram: specialisation → produces beyond original equilibrium.

• Moving resources to fishing → more fish → trade for other goods → higher income, living standards, economic growth.

Evaluation (6)

• Risks of over-specialisation:

  • Resource depletion (e.g., cod TAC reductions).

  • External costs: pollution, congestion.

  • Vulnerability to demand shifts (e.g., vegetarianism).

  • Worker immobility → long-term unemployment.

• Conclusion: boosts efficiency & income but reduces resilience → diversification needed.

(f) Some economists suggest that the market price of cod does not result in the socially optimum level of output. Evaluate the likely external costs from the over-fishing of cod. Use an appropriate diagram in your answer. (20)

Introduction

• Negative externalities: costs imposed on third parties not involved in production/consumption.

• Example: overfishing of cod → private profit decisions ignore environmental/social costs.

• Purpose: assess external costs & market failure.

Knowledge (4)

• Overfishing = negative externality → social cost ignored.

• Socially optimal output (Q*) < market output (QE).

• Extract B: “90% of fish stocks are depleted.”

• Overfishing ↑ supply → ↓ prices → market distortion.

Application (4)

• Sweden fishing 52.4% above TAC → real-world overfishing.

• Cod TACs aim to reduce QE → Q*.

• External costs affect third parties: wildlife charities, Environment Agency, local residents.

• Other industries impacted: excess fish supply ↓ prices for other food items.

Analysis (6)

• Diagram: negative externality of production → MSC > MPC.

  • Market equilibrium: QE at Pmarket.

  • Social optimum: Q* at Psocial.

  • Overproduction: QE > Q* → market failure.

• Overfishing ignores MSC → negative externalities: environmental damage, wildlife harm, water pollution.

• Social costs include cleanup, rehabilitation, and impacts on coastal communities.

• Market price too low → inefficient allocation of resources.

Evaluation (6)

• Difficult to value external costs (wildlife, biodiversity).

• Some impacts long-term, uncertain.

• External benefits: jobs in processing, boat building, net manufacturing.

• Technology improvements reduce negative impacts (safer nets, less oil spills).

• Policy (TACs) can reduce external costs → move QE closer to Q*.

• Overall: overfishing clearly generates negative externalities, but severity depends on technology, regulation, and market adaptation.