OCR Economics Synoptic 2888 June 09 - YOUR GAME PLAN?! Watch

patrick_l
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#201
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#201
(Original post by v901)
Hi there could I have some help with the biofuels question on the tutor2u mock:
Discuss the economic consequences of the EU and US biofuels policy for the global economy.
it's 15 marks and in the tutor2u toolkit they don't give any answers to this question.

I can think of a few answers though:
EU subsidies cause set aside land to be used for prodcution of biofuels so this imposes costs on the environment.
It also causes more land to be used for biofuels so less food is produced causing higher food prices.
Costs to the gov of the subsidy may need to be financed by taxpayers.

I can't think of many for the US.
Can I have some help with this please?
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I have the mark scheme for this paper, I can send it to you if you like?
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RageC
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#202
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#202
ETS + Ctax
Biofuels
Buffer stocks
Max price
Tariffs
CAP in general
Food inflation

Is there any other main specific topics we need to be able to evaluate?
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patrick_l
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#203
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I have just realised i dont think i even know what CAP is...
oops
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v901
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#204
(Original post by patrick_l)
I have the mark scheme for this paper, I can send it to you if you like?
I have the markscheme, but it doesn't distinguish its effects between the EU and the US. I also don't understand the 1st 2 points:

• Reduced C02 emissions and greater production of more carbon neutral forms of transport. Reduction in negative externalities, limiting extent of market failure. Candidates may make use of externality and market failure diagrams for which analysis marks can be gained.

• Green policies promoted by governments as a root to fiscal stimulation. Investment in green technology can act as a stimulant to economies in the midst of current economic down turn.

I've never seen a market failure diagram before. And it says in the extract that biofuels can have an effec of up to 1.7 times worse than diesel. So how does this help reduce negative externalities.

I don't understand what they mean by "Green policies promoted by governments as a root to fiscal stimulation".

If you could help I'd really appreciate it
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patrick_l
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(Original post by v901)
I have the markscheme, but it doesn't distinguish its effects between the EU and the US. I also don't understand the 1st 2 points:

• Reduced C02 emissions and greater production of more carbon neutral forms of transport. Reduction in negative externalities, limiting extent of market failure. Candidates may make use of externality and market failure diagrams for which analysis marks can be gained.

• Green policies promoted by governments as a root to fiscal stimulation. Investment in green technology can act as a stimulant to economies in the midst of current economic down turn.

I've never seen a market failure diagram before. And it says in the extract that biofuels can have an effec of up to 1.7 times worse than diesel. So how does this help reduce negative externalities.

I don't understand what they mean by "Green policies promoted by governments as a root to fiscal stimulation".

If you could help I'd really appreciate it
O right, yer im with you on this one.
I googled market failure diagram but the one i found is the same as a neg externality diagram

and i dont understand the whole fiscal thing either, so i guess im no help! sorry :confused:
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v901
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(Original post by patrick_l)
O right, yer im with you on this one.
I googled market failure diagram but the one i found is the same as a neg externality diagram

and i dont understand the whole fiscal thing either, so i guess im no help! sorry :confused:
Gah, maybe someone else can help us out then.
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spikez
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#207
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#207
some potential answers for q4 on tutor2u mock (not sure if i'm right so correct me if im wrong):

1. increased use of food (land to produce food) for biofuel production ---> reduced supply of food ---> higher food prices ---> negative impact on those on low incomes as food (a necessity) is now more costly to consume.

2. Increased supply of biofuels ---> price of biofuels decreases ---> good for motorists whose cars are adopted to run on biofuels

3. Could lead to fall in oil prices due to increased availability of substitutes (biofuels in this case) ---> fall in demand for oil ---> bad for oil rich/dependant nations such as Saudi Arabia etc.

4. Creation of jobs in primary sector i.e. agriculture.

5. Biofuels still create CO2, and hence are not a complete solution to the negative externalities caused by motoring - Biofueld produce 1.7 times more CO2 (including in the production of it)
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ZizAli
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#208
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A good point to stick in the essays every now and then is that inflation might not be as bad as initially thought. It might reflect an improvement in quality due to genetic modification of plants etc. It is not inflation adjusted to quality.
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vinsta
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(Original post by spikez)
some potential answers for q4 on tutor2u mock (not sure if i'm right so correct me if im wrong):

1. increased use of food (land to produce food) for biofuel production ---> reduced supply of food ---> higher food prices ---> negative impact on those on low incomes as food (a necessity) is now more costly to consume.

2. Increased supply of biofuels ---> price of biofuels decreases ---> good for motorists whose cars are adopted to run on biofuels

3. Could lead to fall in oil prices due to increased availability of substitutes (biofuels in this case) ---> fall in demand for oil ---> bad for oil rich/dependant nations such as Saudi Arabia etc.

4. Creation of jobs in primary sector i.e. agriculture.

5. Biofuels still create CO2, and hence are not a complete solution to the negative externalities caused by motoring - Biofueld produce 1.7 times more CO2 (including in the production of it)
For 2.) I presume you are referring to a subsidy increasing the supply of biofuels? You could argue that if farmers produce too much, the price of biofuels may fall to the extent that the extra demand created from the fall in price may offset the fall in emissions they are meant to achieve (as you quoted 1.7 times worse than diesel).
3.) is a very good point I hadn't yet even considered. Leaving Saudi Arabia aside, the fall in oil prices could lower the cost to firms for purchasing food from farmers (transport costs, packaging etc). If firms pass these lower costs onto consumers food prices will fall.
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spikez
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'the fall in price may offset the fall in emissions they are meant to achieve; (as you quoted 1.7 times worse than diesel) - you lost me at that point, i don't get it
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BJP
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#211
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(Original post by spikez)
5. Biofuels still create CO2, and hence are not a complete solution to the negative externalities caused by motoring - Biofueld produce 1.7 times more CO2 (including in the production of it)
The extract (4bii) says that they produce nitrogen oxide...300 times more powerful than CO2. It says 1.7x the effects of diesel. Don't talk about it in terms of CO2. It is more the case that the nitrogen oxide is worse than CO2 from fossil fuels. Hope that helps.
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BJP
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If the right questions come up we should be OK. Just got to hope they don't **** us over.
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vinsta
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(Original post by spikez)
'the fall in price may offset the fall in emissions they are meant to achieve; (as you quoted 1.7 times worse than diesel) - you lost me at that point, i don't get it
Right ok. If the price of biofuels fall there will be an increase in demand, ceteris paribus. Now if demand increases by so much (because farmers increase supply by a lot) that people start buying lots of biofuel because it is very cheap, it is going to cause even more pollution because it is cheaper and therefore lots of people can buy lots of it.
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vinsta
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#214
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How does 'Reduction in negative externalities, limiting extent of market failure.' arise from the EU biofuels policy????
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spikez
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#215
Here's what I've got so far for question 4 on the tutor2u mock. People feel freee to edit or expand on it!

The EU and US biofuels policy has both positive and negative consequences on the global economy. Lets start off with some of the advantages. The biofuels policy helps reduce CO2 emissions in line with the Kyoto protocol, and increases the production of more carbon neutral forms of transport. This reduces the negative externalities associated with heavy CO2 emitting activities, thus limiting the extent of market failure (draw negative externality diagram with deadweight welfare loss to society reduced?). Secondly, due to the increased supply of biofuels through subsidisation the price of biofuels will decrease. This is beneficial to those motorist who’s transportation methods are adapted to run on biofuels. Thirdly, there may an increase in employment opportunities in the primary sector i.e. agriculture, due to the fact that more workers will be needed to cultivate the biofuels. This can have multiplier effects such as increased consumption, a reduction in unemployment benefits, an increase in government tax revenue which could be hypothecated for research into ‘cleaner’ technology, or even subsidised to provide firms themselves with the ‘cleaner’ technology.

Now, lets explore some of the disadvantages with the EU and US biofuels policy. Firstly, oil prices could decrease, due to the increase in the availability of substitutes (biofuels in this case). The could reduce the demand for oil, which will have negative consequences especially on oil dependant countries such as Saudi Arabia, where revenue gained for exporting oil is a major contributor to the capital inflows? However, the fall in oil prices could be seen as advantageous, as it could lower firms’ costs of production (e.g. transportation costs). If firms pass these lower costs to consumers in the form of cheaper prices, food prices will fall and those on lower incomes will be able to purchase more food, or healthier non-processed food. This will have positive consequences such as a healthier more productive workforce, an increase in GDP etc. Secondly, biofuels still create CO2, hence are not a complete solution to the negative externalities caused by motoring. Thirdly, extract 4bii says that biofuels produce nitrogen oxide, which is 300 times more powerful than CO2 and 1.7 times the effect of diesel, thus is still harming the environment by maintaining/increasing the rate of global warming. Lastly, if the price of biofuels falls, there will be an increase in demand, ceteris paribus. This is good for biofuel farmers, although if demand increases by an excessive amount (due to farmers increasing supply and lower prices) it is going to cause even more pollution due to the fact that is cheap and therefore lots of people can buy lot of it. However this is dependant on the elasticity of the product, for example petrol (a close substitute of biofuels) has inelastic demand, thus demand is not very responsive to a change in the price.
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spikez
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(Original post by vinsta)
How does 'Reduction in negative externalities, limiting extent of market failure.' arise from the EU biofuels policy????
As if people are using less CO2 emitting products, there will be a reduction in the deadweight welfare loss to society, thus less people being affected by the external costs/negative externalities, which are a form of market failure. I think anyway
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vinsta
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(Original post by spikez)
Here's what I've got so far for question 4 on the tutor2u mock. People feel freee to edit or expand on it!

The EU and US biofuels policy has both positive and negative consequences on the global economy. Lets start off with some of the advantages. The biofuels policy helps reduce CO2 emissions in line with the Kyoto protocol, and increases the production of more carbon neutral forms of transport. This reduces the negative externalities associated with heavy CO2 emitting activities, thus limiting the extent of market failure (draw negative externality diagram with deadweight welfare loss to society reduced?). Secondly, due to the increased supply of biofuels through subsidisation the price of biofuels will decrease. This is beneficial to those motorist who’s transportation methods are adapted to run on biofuels. Thirdly, there may an increase in employment opportunities in the primary sector i.e. agriculture, due to the fact that more workers will be needed to cultivate the biofuels. This can have multiplier effects such as increased consumption, a reduction in unemployment benefits, an increase in government tax revenue which could be hypothecated for research into ‘cleaner’ technology, or even subsidised to provide firms themselves with the ‘cleaner’ technology.

Now, lets explore some of the disadvantages with the EU and US biofuels policy. Firstly, oil prices could decrease, due to the increase in the availability of substitutes (biofuels in this case). The could reduce the demand for oil, which will have negative consequences especially on oil dependant countries such as Saudi Arabia, where revenue gained for exporting oil is a major contributor to the capital inflows? However, the fall in oil prices could be seen as advantageous, as it could lower firms’ costs of production (e.g. transportation costs). If firms pass these lower costs to consumers in the form of cheaper prices, food prices will fall and those on lower incomes will be able to purchase more food, or healthier non-processed food. This will have positive consequences such as a healthier more productive workforce, an increase in GDP etc. Secondly, biofuels still create CO2, hence are not a complete solution to the negative externalities caused by motoring. Thirdly, extract 4bii says that biofuels produce nitrogen oxide, which is 300 times more powerful than CO2 and 1.7 times the effect of diesel, thus is still harming the environment by maintaining/increasing the rate of global warming. Lastly, if the price of biofuels falls, there will be an increase in demand, ceteris paribus. This is good for biofuel farmers, although if demand increases by an excessive amount (due to farmers increasing supply and lower prices) it is going to cause even more pollution due to the fact that is cheap and therefore lots of people can buy lot of it. However this is dependant on the elasticity of the product, for example petrol (a close substitute of biofuels) has inelastic demand, thus demand is not very responsive to a change in the price.
If oil prices fall demand would increase, not fall.

I also have no idea what diagram to use for the negative externalities diagram. I was thinking of reducing the MSB for carbon as this would cause a fall in the quantity demand for carbon which is correcting a market failure.
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vinsta
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#218
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(Original post by spikez)
As if people are using less CO2 emitting products, there will be a reduction in the deadweight welfare loss to society, thus less people being affected by the external costs/negative externalities, which are a form of market failure. I think anyway
Yeah ok. But how do you show this deadweight loss?
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spikez
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#219
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(Original post by vinsta)
If oil prices fall demand would increase, not fall.

I also have no idea what diagram to use for the negative externalities diagram. I was thinking of reducing the MSB for carbon as this would cause a fall in the quantity demand for carbon which is correcting a market failure.
so the demand curve (where mpb=msb) would shift in?
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spikez
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#220
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(Original post by vinsta)
Yeah ok. But how do you show this deadweight loss?
in a normal negative externality diagram with the deadweight loss, you draw another supply curve between s1 (mpc) and s2 (msc). and then this will cut through and reduce the deadweight welfare loss.
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