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Economics Unit 2 AS past paper

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Introduction

Unit 2 - Friday 9th June 2006 (a) Using examples from the high speed rail link, explain the terms (i) external costs (ii) private costs. (i) An external cost is a negative effect to a third party who is not directly involved in the activity. Examples: noise pollution, decline in business for cross channel air travel and ferry services, visual pollution, falling property prices. (ii) Private costs are the negative effects to those directly involved in an activity - the consumer or the firm. Examples: $3.7billion financial costs, wages, electricity, raw materials, machinery, land. (b) Analyze one problem associated with estimating the external costs and one problem associated with estimating the private costs of a major project such as the high spend rail link. Problems associated with estimating external costs include it is hard to quantify external costs for example, the amount of visual damage, level of noise pollution, the impact on property prices, the extent of jobs lost in sea and airline industries. It is also hard to attach a monetary value on to such things as the loss of a scenic view, the value of noise pollution and the value of a lost job. ...read more.

Middle

External benefits associated with the high speed rail link include - jobs created, a decrease in journey times, increase in international trade and tourism - which will lead to jobs and create revenue, domestic journey times also decrease, road congestion will be reduced, regeneration of East London and Kent - 50,000 jobs and $8m of investment predicted, urban renewal of east London. The external benefits can be seen on the diagram above. If the external benefits were internalized output would rise, as would price. We assume that the marginal private cost is equal to the marginal social cost as we are dealing with the benefits. The difference between the marginal private benefit curve and the marginal social benefit curve represents the external benefit. If external benefits were internalized, the welfare gain would be obtained. Another reason justifying the case of the government subsidizing the rail link is that the external benefits of $3420m outweigh the subsidy of $1800m. However, in the short term these benefits may be limited; regeneration benefits will arise over a long period of time and are dependant upon sufficient investment. ...read more.

Conclusion

Government failure is when the government intervenes to correct market failure but it infact leads to net welfare loss and a more inefficient allocation of resources. (ii) Discuss the case for government spending on improving road transport links to the Channel Tunnel. For... * Road system to the Channel tunnel is heavily congested and requires urgent investment * Road transport demand to the Channel Tunnel is likely to continue increasing rapidly due to growth in trade and tourism * Most people use road instead of rail so more people would benefit, and a rail system already exists for international services and has spare capacity * It will improve the operation of labour markets in the region * It will attract more businesses to locate in the region * Issues raised against government spending on improving road transport may be regarded as analytical. Against... * It costs a lot of money to improve roads and so there may be tax implications * Explain negative externalities associated with road transport - noise pollution. * Opportunity cost - for example more hospitals could be built * It takes time for the roads to be built * Road improvements may cause demand for road journeys to grow more quickly. ...read more.

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