Suggested Solutions for 25 marks Efficiency-Related Essays (9708/42) (CIE) (CAIE)

October/ November 2011 (V1)

Question 2

The removal of imperfections in the market leads to an increase in efficiency in the allocation of resources. Discuss whether you agree with this view (25m)

P1 - define and explain social efficiency, productive efficiency and allocative efficiency (both are subset of social efficiency) (3 diagrams)

P2 - define and explain market failure 

P3 - demerit good and its relationship with negative production and consumption externalities (2 diagrams) 

P4 - merit good and its relationship with positive production and consumption externalities (2 diagrams)

P5 - monopoly and why it is a market failure (1 diagram)

P6 - using indirect tax to deal with demerit goods (1 diagram) and evaluation e.g. difficulty to estimate negative externalities accurately and also prevalence of black market

P7 - using subsidies/ direct provision of merit goods and evaluation e.g. very costly where taxes may have to be increased

P8 - deregulation to promote competition in an industry/ competition authority may break down a monopoly e.g. how British Airport Authority was forced to sell Gatwick and Stansted Airport in the UK and evaluations e.g. unable to enjoy EOS so becomes productively inefficient and also fall in profits means unable to invest in new products and so allocatively inefficient

P9 - government interventions may not completely improve resource allocation but better than without any

May/ June 2013 (V1)

Question 2

It is important that an economy makes the most efficient use of its resources. This can only be done if firms are allowed to increase in size. Government regulation of firms should, therefore, be minimised

Discuss whether you agree with this statement (25m)

P1 - define and explain social, productive and allocative efficiency (worth noting that the other two are subset of social efficiency) (3 diagrams)

P2 - big firms may enjoy EOS and hence become productively efficient 

P3 - evaluate e.g. may experience DEOS and so the opposite may happen too

P3 - big firms have higher profits which can be reinvested and this may lead to breakthrough discoveries and so become allocatively efficient

P4 - no worthwhile competition and so may not have the incentive to invest

P5 - reason for the existence of mixed economy. Government needs to intervene to improve resource allocation

P6 - Government may deregulate the industry to introduce more competition. Prices will fall and so firms have to become productively efficient

P7 - May no longer enjoy EOS and so becomes productively inefficient

P8 - Competition will automatically force firms to invest in products. Give back values to consumers. Allocatively efficient

P9 - However, extreme competition may reduce profits and hence inability to invest. Becomes allocatively inefficient instead

P10 - Neither government nor private sector on its own can ensure efficiency. Thought that both may complement one another