(2021) A Level H2 Econs Paper 2 Essay Q1

Disclaimer: The answers provided on our website is a 'first draft outline’ version of the answers provided for your convenience.

For the full, finalised answers, please click here to purchase a hard copy of the Comprehensive TYS Answers authored by Mr Eugene Toh and published by SAP. (The page might take awhile to load)

Search for “COMPREHENSIVE ANSWERS TO A LEVEL H2 ECONOMICS YEARLY EDITION” or “9789813428676” to purchase.

1. The market for bicycles is often said to generate external benefits such as reduced traffic congestion and reduced air pollution.

(a) Explain how economic theory suggests consumers act rationally to decide whether or not to buy a bicycle, and how producers of bicycles act rationally to determine their level of output. [10]

How consumers act rationally to decide whether or not to buy a bicycle 

We assume that consumers in general, would like to maximise their utility with the income constraints they have.

They will thus consume a good when the marginal utility from consuming the good exceeds the price of the good.

The marginal utility that a consumer would derive from consuming a bicycle would be based on the satisfaction that the consumer would derive from having the bicycle. This utility could be largely determined by factors such as whether

• The bicycle provides an essential mode of transportation for the consumer

• The bicycle brings about leisure value

If the price of the bicycle is lower than the marginal utility, the consumer would buy the bicycle while if the price of the bicycle is higher than the marginal utility, the consumer will not buy the bicycle.

Can further elaborate with examples

How producers of bicycles determine their level of output 

We assume that producers of bicycles in general, aim to maximise profits.

In order to maximise profits, they will choose to produce at an output level where MC = MR

Why MC = MR is the profit maximisation output

• When MC > MR, the cost of producing one additional unit of the good exceeds the revenue derived from selling one extra unit of the good. The producer will benefit (cut losses) from decreasing output level.

• When MR > MC, the revenue derived from selling one extra unit of the good is greater than the cost of producing one additional unit of the good. The producer can still increase revenue from increasing the output level.

Thus, only when MC = MR, profit maximisation occurs.

Use of diagram to illustrate is appropriate

(b) Discuss how government intervention in the market for bicycles could be used to maximise social welfare and consider how likely it is that such intervention will be successful in achieving this aim. [15]

How government intervention in the market for bicycles could be used to maximise social welfare 

 Brief explanation on positive externalities from use of bicycles 

• Bicycles as a transport option is a substitute for motor vehicles such as cars & motorcycles. Individuals decide on using bicycles as a mode of transport based on their own private costs and benefits. There exists positive externalities (benefits conferred to 3rd parties from the consumption or production of the good) from the use of bicycles. 

• When more individuals switch from use of motor vehicles to bicycles, it reduces both traffic congestion and vehicle emissions. These benefits are extended to the rest of the population in the form of less air pollution resulting in better health and reduction in time spent in congestion, thus improving productivity and number of available hours for work. 

 

Government intervention to encourage use of bicycles - Allowing & granting licences for bike-sharing firms to operate 

• In Singapore’s context (example) - the government has allowed and granted licences for bike-sharing firms to operate and assisted in providing specified parking spaces around the country. 

• As bike-sharing firms proliferate and provide a good number of bicycles available at a reasonable price and at convenient locations - this could make it easier for individuals to gain access to bicycles and also make cycling more convenient and thus improving it as a substitute for motor transport. 

 

Government intervention to encourage use of bicycles - Building more cycling infrastructure 

• The government can also build more cycling infrastructure to make cycling more convenient  / safer and thus improving cycling as a substitute to motor transport. 
   
   

How likely such intervention will be successful in achieving this aim  

Space constraints 

• In countries such as Singapore, space constraints may make it difficult to substantially increase the amount of cycling infrastructure such as cycling lanes given the limited land space available. While an attempt to increase the number of cycling lanes available island wide can be made, it will require careful planning, expensive spending on road works as well as accepting the trade-off for other uses for such space. 

 

Indiscriminate bike parking & regulatory requirements hard for firms 

• An unintended consequence of allowing bike-sharing firms to operate was the indiscriminate parking by bike-users, this often left an unsightly presence of a large number of bikes thrown on road-sides, causing disamenities to people living / working in such areas. 

• The government can step in to regulate by requiring bike-sharing firms to enforce proper bike-parking rules but such manpower costs can be impossible to take on - often causing such bike-sharing firms to eventually leave the industry. (due to lack of profitability) 

 

Requires behavioral shift away from motor vehicles 

• The switch away from motor vehicles can also require a mindset or behavioural shift from motor vehicles - with some treating cars as a status symbol. 

 

In conclusion - a balance need to be found between encouraging the use of bicycles to reduce congestion while recognizing that in certain cases, encouraging the use of bicycles can cause certain unintended consequences arising such as indiscriminate parking of bicycles as well as the dangerous use of e-bikes on pedestrian paths causing harm to others 

Found our TYS answers useful?

Maximise your A-Level H2 Economics preparation with the ETG A-Level H2 Economics TYS Crashcourse! Perfect for students looking to enhance their skills in both essay and case study analysis, this comprehensive 3-day crashcourse will cover over 60 essay questions and 20 case studies from the A-Level Economics Ten-Year Series. Whether you're attending onsite or via Zoom, our experienced tutors will guide you through the intricate demands of H2 Economics, offering expert feedback and graded answers. For the best economics tuition in Singapore, sign up now to secure one of the limited onsite seats!