Paper 3 question on positive externalities, income elasticity of demand, the Engel curve and common-pool resources
Paper 3 sample question
IB Economics Paper 3 includes two compulsory questions. This is a sample Paper 3 question. The time allowed for Paper 3 is 105 minutes, so students should spend 52.5 minutes on each question.
This Paper 3 style question is on positive externalities, income elasticity of demand, the Engel curve and common-pool resources
Question paper
Markscheme
Fishing in Peru
Nueva Pescanova Group (NPG) is expanding its presence in Peru with the construction of a new $7million fish processing factory near Lima. NPG is a Spanish-owned fishing and fish processing business that owns a large fishing fleet and operates in 24 countries across the world. Investment in its new plant is expected to bring significant positive externalities such as improved infrastructure, employment, and increase profits to local businesses.
An economic research consultancy has produced the following information on the investment by NPG in Peru. At the market output of 0.9 million units for the investment, the marginal social benefit is $27, and the marginal social cost is $23. The socially efficient output of the investment where the marginal social benefit equals the marginal social cost is 1.2 million units.
Questions
a. (i) Define the term positive externalities. [2]
Positive externalities are the spill-over benefits on third parties that are the result of economic activity.
Using the cost and benefit data produced by the consultancy, calculate the:
(ii) Value of the positive externalities associated with the new fish processing factory. [2]
$27 - $23 = $4
(iii) Under allocation of resources in the market. [2]
1.2 million units – 0.9 million units = 0.3 million units
(iv) Value of the welfare loss. [2]
0.3 x $4 / 2 = $0.6 million
The income elasticity of demand for fish in Peru is 0.8. Household incomes in Peru have risen by 4 per cent this year.
(v) State the equation for income elasticity of demand. [2]
% change in quantity demanded of fish / % change in income = Yed
(vi) Using the income elasticity data, calculate the percentage change in the quantity demanded of fish. [2]
4% x 0.8 = 3.2% change in the quantity demanded of fish
(vii) Using an Engel curve diagram, explain what the income elasticity of demand value for fish suggests about the relationship between the demand for fish and changes in income in Peru. [4]
As income rises in Peru the quantity demand for fish rises but at a less than proportionate rate relative to the change in income. This is shown in the diagram where income rises from Y to Y1 and quantity demanded rises from Qd to Qd1.
(viii) Explain why sea fishing can be considered a common pool/access resource. [4]
Fishing can be considered a common pool resource because the fish in the sea is a non-excludable resource because it is difficult/impossible to stop people from accessing fish in the sea. Fish in the sea is also a rivalrous resource because the increased consumption of one person reduces the availability of fish in the sea to others.
b. Using the data provided and your knowledge of economics, recommend a policy that the Peruvian government could introduce to address unsustainable fishing off its coast. [10]
Students should focus on a single policy to be recommended. Possible policies might include:
- The government could put in place regulations and legislation that limits the amount of fishing off the coast of Peru. This might take the form of fishing quotas which only allow fishing boats to catch a certain quantity of fish.
- The government might set up a system of property rights off the coast of Peru which means fishing firms would have to pay to fish off the coast of Peru.
- The government could set up a system of collective self-governance where fishing firms could work together to set their own limits on the quantity of fish caught off the coast of Peru.
- The government could put an indirect tax on fishing firms that fish in the waters off the coast of Peru to reduce the quantity of fish they catch.
- The government could engage in international cooperation with other nations that fish in the waters off the coast of Peru to reduce the quantity of fish caught.
- Evaluation might include discussion of the costs to the government of setting up and operating a regulatory system and a self-governed agreement to reduce the quantity of fish caught. A tax system will increase the costs of firms in the industry which could lead to business failure, unemployment, and higher prices. A system of property rights may not be practical in a sea situation.
- Final policy recommendation.
Markscheme criteria
1–2
- The response identifies a policy.
- No economic theory is used to support the recommendation.
- Economic terms are used but are not relevant.
- There is no use of the text/data to support the recommendation.
- There is no evidence of synthesis or evaluation.
3–4
- The answer identifies an appropriate policy.
- The response has used limited economic theory to support the recommendation.
- Some relevant economic terms are included.
- There is no use of relevant text/data to support the recommendation.
- There is some evidence of superficial synthesis or evaluation.
5–6
- There is an explanation of an appropriate policy.
- The answer uses relevant economic theory to partially support the recommendation.
- Some relevant economic terms are used appropriately.
- The answer includes some relevant information from the text/data to support the recommendation.
- The answer has evidence of appropriate synthesis or evaluation but it lacks balance.
7–8
- There is full explanation of an appropriate policy.
- The response uses relevant economic theory effectively to support the recommendation.
- Relevant economic terms are used mostly appropriately.
- The answer includes relevant information from the text/data to support the recommendation.
- The answer has evidence of appropriate synthesis or evaluation but it lacks balance.
9–10
- There is full explanation of an appropriate policy.
- The response uses relevant economic theory effectively to support the recommendation.
- Relevant economic terms are used appropriately throughout the answer.
- The answer includes relevant information from the text/data that is used appropriately to support the recommendation.
- The answer has evidence of appropriate and effective synthesis or evaluation.
Total [30]