Question 1
a. Identify four negative externalities and four positive externalities of the COVID 19 pandemic and briefly explain them.
There are four negative externalities of the COVID 19 pandemic. First, since COVID 19 spreads through human interaction, people would get infected by contaminated objects and surface (Department of Health, 2020). Also, this virus has become to a pandemic and the government announced a lock-down. It caused the economy being adversely affected. The unemployment rate has risen, and the economy has fallen into a recession (Gopinath, 2020). Moreover, it affected the consumer behaviour, due to pandemic, many people engaged to a stockpiling behaviour which triggered panic-buying (Notebaert, 2020). Finally, this situation also extends the potential mental health effects on people, it is because people almost get away from their daily routine and social (SA Health,2020). However, there are still some positive externalities occurred. According to a green energy research (Collins,2020) reported, the shutdown has the positive impact to environment. it reduces pollution levels and increase the air quality. Furthermore, people are gaining better knowledge about new viruses and their prevention, people needs to comply with social distance and self-isolation (Department of Health, 2020). In addition, technologies developed is one of the most important elements for people who work at home remotely during COVID 19 (Bukszpan, 2020). At the same time, it is a big development of intensive care capacity and virus testing system, health systems got experiences from this pandemic and implement targeted strategies (Department of Health, 2020).
There will be a positive externality in the event of finding a vaccine for COVID 19 in future because if one person gets vaccinated, then the risk of virus spreading to other people will reduce.
Thus, the positive externalities associated with developing a vaccine for COVID-19 will be reduced transmission of the disease.
As shown in the graph above, demand curve shows the private marginal benefit. Marginal social benefit is the sum of private marginal benefit and external benefit. The marginal social benefit curve above the private marginal benefit curve.
The efficient outcome is represented by point ‘E’. The socially optimal outcome is Q*.
However, an unregulated market produces the quantity Q (less than socially optimal output). Thus, there is underproduction. Also, the market failure arises and creates a deadweight loss.
c. Illustrate and briefly explain consumer, producer and total surplus of an expected positive externality of a COVID 19 vaccine by drawing a relevant diagram
The consumer surplus is represented by the area below the demand curve and above the price line. As shown in the figure above, the consumer surplus is represented by area ‘a’. The producer surplus is represented by area ‘b’. Since there in underproduction, a market failure arises which distorts efficiency. This results in a deadweight loss (as shown by the shaded triangle). Thus, the total surplus is consumer surplus plus producer surplus minus the deadweight loss.
d. Explain how an expected positive externality of a COVID 19 vaccine could be internalised by using a diagram
A positive externality is internalized by giving subsidies. The government grants subsidies to produce vaccine, then the cost of producing vaccines reduces. As a result, the supply curve shifts rightwards. Therefore, the output increases to the socially optimal level.
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Initially, the economy is at point ‘a’. If the government grants subsidies to produce vaccine, then the supply curve shifts rightwards.
So, the economy moves to point E’ and the output increases to the socially optimal level (Q*).
e. Illustrate what happens to consumer, producer and total surplus due to this policy.
As the grape above, the economy produces the socially optimal level, then there is no deadweight loss. The consumer surplus is represented by the area'(a+b+c+d). The producer surplus is represented by the area'(e+f+g). Since there is no deadweight loss, the total surplus increases.
As explained in recent world business reports, “the inability of OPEC and other major oil exporting countries to limit the supply has sent oil market into turmoil” in recent weeks. However, the following new development has taken place very recently.
QUESTION 2 (10 marks, word limit 500)
a. Explain the main characteristics of the world oil market by using a suitable market structure.
The world oil market is a type of market which only has few sellers and a large group of buyers. Also, the producers will make decision on price together and they can gain profit from changing price (Euroforce Global, 2020). Therefore, the oil market is not a competitive market structure. Thus, the world oil market has the same characteristics with oligopoly market structure.
b. Using the demand and supply model explain step-by-step what happened in the world oil market with valid arguments during the COVID 19 pandemic and explain the way in which the latest agreement (explained in the above article) can stop further decline in the world oil price. (2 marks)
Since the COVID 19 pandemic occurred, the government implements lockdown and self- isolation to public. Hence, it brings some negative impacts to the oil industry. As the diagram shown, demand has a big movement to the left and the price goes down.
However, the newest argument will be implemented in May and it started to reduce the production of oil. Due to decreasing the world supply of oil, AS will shift to the left and the price will be increase from P’ to P” which is a small movement to improve profit of oil market. There will have a new equilibrium, where due to production
decrease, quantity is reduced by even more to Q”.
c. Why do you think OPEC is becoming less effective in controlling world oil price? Briefly explain. (2 marks)
The most important reason why OPEC is becoming less effective in controlling world oil price is OPEC could not achieve a consensus with other countries. The OPEC organisation keep trying to decrease the supply of oil to raise the prices (Barro,2018). However, the trending of world market oil has been changed. Moreover, most of the countries are worried about raising the oil piece will cause public conflicting. At the same time, America proposes they can produce oil more than before which means OPEC is not the biggest supplier anymore (Barro,2018. Thus, it will be another reason OPEC becomes less effective in controlling oil prices.
d. Why do you think the recent deal will save hundreds and thousands of energy jobs in the US as the President Trump has mentioned? Briefly explain. (2 marks)
According to the Business News (2020) claimed that Donald Trump has accomplished the agreement of reducing global oil output with World’s top oil producers. This agreement also can end the price war. It can also explain why American President said the recent deal will save hundreds and thousands of energy jobs in the US. It is because OPEC reduced the number of oil produce to 9.7million and America, Brazil and Canada will provide 3.7 million (The Irish Times,2020). This decision is increasing the supply and profit to other countries including U.S energy industry.
e. Using the Prisoners Dilemma game explain the way in which collusion is better than competition for oil producers. (2 mark )
Prisoners Dilemma is a theory that used in business management, psychology and biology areas (Policonomics, n.d.). Using in this situation, it shows the world oil market is using the oligopoly market structure and it does not have much competition in this structure. Also, any price change on part of one competitor is seen as an act of betrayal of an established status quo. However, in the game theory presented that everyone would have different decision making, small companies might against the oligopoly. Then, it will become the worst aspect which is collapse. Therefore, collusion is better than competition for oil producers.
Question 3
“We need to have an urgent debate about our lack of national security” (Ben Packham, Foreign affairs and defence correspondent, The Australian)
“We need to have smart sovereignty. We can’t be independent of global supply chains. But 90 per cent dependence on imported fuels and imported medicines is not acceptable in the world we live today” (John Blackburn, Institute for Integrated Economic Research)
“America will never be a supplicant nation. We will be a proud, prosperous, independent and self-reliant nation. We will embrace commerce with all, but we will be dependent on none” (Donald Trump, US President)
(Source: The Sum of All Threats, The Australian, 3 April 2020, page 12)
“Coronavirus pandemic will cause a ‘much bigger wave’ of protectionism, says trade expert”
Source: https://www.cnbc.com/2020/04/10/coronavirus-expect-a-lot-more-protectionism-says- trade-expert.html
1. Using the demand and supply model explain the cost of tariff protection. (3 marks)
As the graph shown above, Pw= world price. When the tariff add world price, it will be the price that outport buyer need to purchase and there is an increasing amount of price. Moreover, when the price goes up the Quantity from Q2 to Q4. The rectangle between Pw and Pw + tariffs is the tax revenue. However, these two triangle beside will be a dead weight loss.
2. What are the main arguments for protection? Briefly explain. (2 marks)
According to the article Murphy (2018) said, there are two main arguments for protection: national defence and affected the costs of production. The first argument is about national defence, once the war occurred the countries will not have the ability to produce defence goods by themselves because they rely outport product. Also, it can be related to the second argument which is goods price. If the country which has ability to monopoly and increase the cost, it will cause a huge loss to others.
3. In the context of the current pandemic of Coronavirus, the national security argument for protection has become very popular among politicians and journalists. Briefly discuss this bigger wave protectionism in terms of the old argument of national security using some industry examples of new strategic importance (5 marks)
Due to COVID 19 pandemic, the national security argument for protection becomes very popular. There are some example of United State. First, it is about the aluminium and steel as U.S decides to increase the price of these products to protect domestic industries’ profits (Cheng, Whitten and Hua, 2019). Furthermore, the other huge argument is about Huawei which has the potential to become a giant competitor with other telecom companies (Cheng, et al, 2019). It is a reason why U.S. wants to prevent its development to protect the national security.