Suggested Answers of BT2 Revision Package - ASKnLearn

LevelsL3(7m – 10m)L2(5m – 6m)L1(1m - 4m)Descriptors- Clear explanation of all 3 basic questions of allocation anddemand-supply analysis- Sufficient depth/ scope- Insufficient depth/scope in addressing the basic questions ofallocation.- Some attempt in addressing the demand-supply analysis- Some errors in explanation- Poor and erroneous explanation with little understanding of howthe price mechanism allocates resources.(b) Evaluate the view that a government such as that of Singapore should subsidize entry tomuseums and tickets to watch arts performances. [15]Introduction- the shortcomings of the price system as a mechanism to allocate resources explains the economic rationale for government intervention in a market economy. - presence of merit goods and positive externalities in the case of museums and arts performances Thesis: Govt should subsidize- explanation of the type of market failure for museums and arts performancesà positive externality & merit goodsPositive externalities- occurs when third parties in the society benefit from the consumption of a commodityor service by private individuals- For museums and arts performances à there exist external benefits such as morecultured and refined society, inculcate ability to appreciate arts, encouraged localartists showcase their work, boost to tourism and hospitality industry.o Divergence between MSB and MPB (MSB>MPB)o Left to the free market, underconsumption as individuals (producers andconsumers) disregard the external benefitso Therefore, they will choose to equate their marginal private costs andmarginal private benefits, ignoring the marginal external benefit generated.This is shown by point E 2 on Figure 1.o allocative efficiency is not achieved at the free-market equilibrium.§ Society seeks to maximise the welfare of the society and would thusprefer to consume/produce where MSB=MSC, as illustrated by point Eon both diagrams, illustrating shaded area as deadweight losses