(2020) A Level H2 Econs Paper 2 Essay Q2

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2. Concerns about future shortages of water resulted in Singapore’s national water agency, PUB, increasing the price of water by 30% from 2017. By 2060, Singapore’s total water demand could almost double. 

(a) Explain why a shortage of water might still exist after the rise in the price of water. [10]

Why there was a shortage before 

1. Water prices in Singapore are not determined via market forces of demand and supply. 

2. Instead, water prices are determined by the government via the PUB (a government agency). As such, water prices have remained unchanged since 2000. 

3. Increasing demand caused by the rising population as well as rising cost of production resulting in a fall in supply should have resulted increases in prices 

4. Instead, an ‘unsaid’ price ceiling Pmax has been imposed on the price of water as seen in Figure 1 below. 

5. As Pmax, the quantity demanded for water exceeds the quantity supplied of water. 

6. The shortage is currently being met by PUB through the use of state funds 

What happens after the rise in the price of water 

1. A 30% increase in the price of water would unlikely bring the prices to the equilibrium price Pe, but instead bring the prices to P1 

2. At P1, a shortage still exists as the quantity demanded at Q2 is still greater than the quantity supplied at Q1 

Why a shortage might still exist after the rise in the price of water 

1. As mentioned, the shortage might not have been completely eliminated if the 30% price increase does not sufficiently close the gap between Pmax and Pe 

2. In addition, continued increases in population size will continue to increase demand while the higher cost of production will continue to decrease supply, which can continue to result in a shortage despite the rise in the price of water 

(b) Discuss whether the government policy of increasing the price of water is the only effective way to overcome future water shortages. [15]

How increasing the price of water can overcome shortages 

1. The water price is being set by the government to be lower than the market equilibrium price, effectively putting in place a price ceiling 

2. Increasing the price of water will effectively raise this price ceiling to a higher level 

3. At a higher price, there will be a decrease in quantity demanded and an increase in quantity supplied – reducing the shortage from Qd-Qs to Q0-Q1 as seen in Figure 1 below.

Limitations 

1. As demand for water continues to increase due to increased population size / incomes and a decrease in supply of water due to increase cost of production à the market equilibrium price is set to rise again while if the government’s pricing of water doesn’t change the shortage will again increase. 

Reduce demand or increase the supply for water 

1. As mentioned earlier, as long as an artificial price ceiling is held in place by the government, any increase in demand or decrease in supply for water will cause an increase in the market equilibrium price of water 

2. As the market equilibrium price of water increases – the shortage created caused by the price ceiling will worsen / be present 

3. Thus, the government can adopt policies to either reduce demand for water or cut the cost of production (to increase the supply) for water. 

4. Reduce demand – the government can carry out marketing campaigns to attempt moral suasion in educating the public on the need to conserve water 

5. Cut cost of production – increase research & development on production techniques to reduce the cost of production for water 

Allow the market to decide on pricing of water 

1. Alternatively, the government can also allow the prices of water to be set by market forces as opposed to putting in place an artificial price ceiling for water 

Limitations/Issues 

1. There can be significant political backlash from letting prices ‘adjust upwards’ as water is a necessity. This is evident from the significant public displeasure during the repricing of water by 30% in 2017. 

2. Water can also be considered to be a merit good & absolutely essential – thus the government steps in to implement a price ceiling and covers the shortage to ensure that water is priced within the reach of the general population. 

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