1. Study the extract and data below and answer the questions that follow.

World food prices 

(1)Food prices have risen by 45 % since the end of 2006. Prices have risen due to a mix of long-term and temporary factors. Strong food demand from emerging economies, reflecting stronger per capita income growth, accounts for much of the increase. Rising biofuel production adds to the demand for corn, in particular, because corn is used in the production of biofuels. In addition, increased production of corn leads to falling production of other foods, raising their prices as well. At the same time, elasticity of supply of food remains low and inventory levels (stocks) in many food markets have declined to the lowest levels in years. Drought conditions in major wheat-producing countries (e.g. Australia and Ukraine), and higher input costs (animal feed, energy, and fertilizer) have also contributed to higher food prices. 

(2)Table 1 outlines the policy responses to increasing food prices in some countries, some of which have made the problem worse.

(3)Higher food prices affect socioeconomic groups and households within countries differently. Higher food prices hurt the urban poor because food accounts for a very large share of their expenditures. In many countries, food can account for 70 to 80 % of expenditures by the poorest quarter of the population. In such circumstances, food price increases can have a large negative impact on their purchasing power. 

(4)Farmers in food exporting countries may benefit from higher prices assuming that food price increases “trickle down” to farmers. Since farming is the major source of income for a large part of the rural population in most developing countries, higher prices could help to reduce rural poverty. The size of the benefit will depend on whether farmers are able to respond to the higher prices through increased investment, which would allow them to increase supply.

(a) Define the following terms indicated in bold in the text:

(i) indirect tax (Table 1)

(ii) investment (paragraph (4)).

(b) Using an appropriate diagram, explain how rising biofuel production may affect the market for corn (paragraph (1)).

(c) Using an appropriate diagram, explain why the elasticity of supply for many commodities is low.

(d) Using information from the text/data and your knowledge of economics, evaluate Ecuador’s policy response to increasing food prices (Table 1).


2. Study the extract below and answer the questions that follow.

Pollution of Indonesia’s Cisadane River continues 

(1)“I still remember when the water in the Cisadane River was very clean – I could clearly see fish swimming around,” said a 65-year-old resident, as he remembered his childhood. “Look at the river now – no one can see the bottom of it, despite being only about two metres deep. The water is dirty, smelly and heavily polluted,” he complained.

(2)Indonesia’s economic growth over the past three decades has meant that many industrial firms have been established along the riverbanks. It is said that these firms are the most serious polluters of the river and are suspected of continuously dumping their liquid waste directly into the water.

(3)Unfortunately, the polluted river is the main source of water for local water suppliers, who take and process the polluted water to serve the needs of their 500 000 customer. This doesn’t include thousands of locals living along the riverbanks who also use the river water for their daily needs – for washing, bathing and even cooking.

(4)A representative of one of the water suppliers told The Jakarta Post recently that the pollution in the river water had given rise to huge water processing costs to make the water safe for domestic use by customers. Although the water suppliers are able to pass on most of the increased costs to their consumers, this worsens the living standards of local households. According to the suppliers, the latest water sample indicated that the water contained chemical substances which greatly exceeded the limits set out in government regulations.

(5)The water suppliers blamed officials at the local environmental agencies for their failure to control the illegal dumping of liquid waste into the river. Along with the possible danger for people using the water, the pollution had also damaged the environment. This clearly represents a grave threat to sustainable development. One village leader complained, “the polluted river water has also killed fish in ponds, the area of which extends to around 200 hectares. The government is doing nothing. These companies should be fined”.

(6)However, environmental agency heads claim “we have regulations but it’s impossible for us to monitor hundreds of industrial firms that allegedly dump their liquid waste into the river at night. We do not have the necessary inspectors and equipment”.

(a) Define the following terms indicated in bold in the text:

(i) economic growth (paragraph (2))

(ii) sustainable development (paragraph (5)).

(b) Using an appropriate diagram and the concept of elasticity, explain why“the water suppliers are able to pass on most of the increased costs to their consumers” (paragraph (4)).

(c) Using an appropriate diagram, explain why the problem discussed in the text illustrates an example of a market failure.

(d) Using information from the text/data and your knowledge of economics,evaluate the use of regulation as a solution to the market failure caused by the pollution of the Cisadane River.




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