(2015) 8819 H1 Econs Paper CSQ 1 Suggested Answers by Mr Eugene Toh (A Level Economics Tutor) (Copy)

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ai. Non-excludability refers to an inability to exclude any particular individual or group from 

consuming a good, even if he/she has not paid for it. An example would be street lights. Once a street light has been provided for, passers-by who did not contribute to the cost of the street lights cannot be excluded from the benefits that a well-lit street provides.

aii. In the operation of a free market, firms will account only for the private costs associated 

with the production of a good which can include production costs such as rent, wages, raw material costs and the private benefits associated with the sales of the good, which will be revenue derived from selling the goods produced. Production will thus take place at Qm where Marginal Private Costs (MPC) = Marginal Private Benefits (MPB).

This fails to account for negative externalities. A negative externality is a cost imposed on a third party not directly involved in the production or consumption of the good.

The presence of negative externalities in the form of marginal external costs will mean that Marginal Social Costs, which are the additional cost to society from the production of 1 more unit of the good, exceed Marginal Private Costs.

Since the socially optimal level of production should be at Qs where MSC = MSB, while the market equilibrium output is at Qm, there is an overproduction of the amount QsQm.

b. The total number of visits between financial year 2002/03 and 2011/12 generally 

increased.

There was a fall in visits in the financial year 2005/06.

 c. A recession could mean that incomes of consumers would be falling. This will reduce 

purchasing powers of would-be museum visitors, causing a fall in demand for visits to museums from DD0 to DD1.

At the initial price P0, there will now be a surplus, resulting in downward pressure on prices to P1.

Output will also fall from Q0 to Q1.

The total expenditure will thus fall from P0E0Q0 to P1E1Q1.

d. Concept not tested in current syllabus

ei. A merit good is a good deemed by the government to be socially desirable but yet 

underconsumed. Underconsumption of a merit good can be due to imperfect information or presence of positive externalities. In the case of a merit good, the private market equilibrium will be at Qm where MPC = MPB but the socially optimal level of consumption should have been at Qs where MSC = MSB.

What a subsidy would do would be to shift the MPB curve from MPCB to MPB0 + Subsidy.

This should then ideally shift the output level from Qm to Qs, correcting the underconsumption problem.

eii. To critically evaluate the allocation of scarce government resources toward subsidies for 

museums in the UK, it is essential to consider both microeconomic and macroeconomic objectives. From a microeconomic perspective, the goals of efficiency and equity are paramount. Efficiency, particularly allocative efficiency, entails distributing resources in a manner that maximizes societal welfare, while equity involves ensuring a fair distribution of resources across the populace. Subsidies aimed at museums could potentially enhance allocative efficiency by making cultural and educational resources more accessible, overcoming cost barriers that might lead to underconsumption. However, the equity implications of such subsidies merit scrutiny, as the benefits might not be evenly distributed among all societal segments, potentially favouring certain demographics over others.

Macroeconomic objectives, such as maintaining a low inflation rate, fostering sustained economic growth, and achieving full employment, also play a crucial role in this analysis. Subsidies can address market failures resulting from positive externalities or imperfect information by either boosting production to more socially optimal levels or encouraging consumers to increase consumption of beneficial goods. Museums, for instance, generate significant positive externalities—ranging from educational enhancement and cultural preservation to economic spillovers that benefit local businesses and tourism sectors. Quantifying these externalities provides a clearer picture of the societal benefits derived from museum subsidies.

However, the effectiveness of museum subsidies must also be weighed against their opportunity costs. Given the scarcity of resources, the funds allocated to museum subsidies could alternatively be directed towards other pressing needs such as healthcare, education, or infrastructure development. The challenge lies in assessing whether the societal benefits from museum subsidies justify their costs, especially when compared to potential returns from alternative investments.

Another critical factor is the fiscal sustainability of museum subsidies. In scenarios where the government faces persistent budget deficits, subsidizing museums could exacerbate fiscal pressures, leading to increased borrowing and higher future repayment costs. This situation underscores the need for fiscal prudence and careful prioritization of government spending.

Moreover, alternative funding models for museums, such as private donations, sponsorships, membership fees, or public-private partnerships, offer viable solutions to alleviate the financial burden on government coffers. These models can provide sustainable funding sources for museums while enabling them to fulfil their societal roles.

In conclusion, while museum subsidies can potentially address issues of efficiency and equity by mitigating market failures and ensuring broader access to cultural and educational resources, a comprehensive analysis must also consider the opportunity costs, fiscal sustainability, and possible alternative funding mechanisms.

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