LH*(S10-1132-01)

GCE AS/A level

1132/01

ECONOMICS – EC2

P.M. MONDAY, 7 June 2010

2 hours

ADDITIONAL MATERIALS

In addition to this examination paper, you will need a 12 page answer book.

INSTRUCTIONS TO CANDIDATES

Answer all the questions in Section A.Answer one question from Section B.Answer one question from Section C.

You are advised to spend no more than 55 minutes on Section A.

Write the numbers of the questions you have answered on the front of your answer book.

INFORMATION FOR CANDIDATES

The number of marks is given in brackets at the end of each question.

You are reminded that assessment will take into account the quality of written communication used inanswers that involve extended writing in Section B part (b) and Section C part (b).

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SECTION A

Answer all the questions in Section A.

1. Study the information below and then answer the questions that follow.

Aviation carbon trading plan will sell the climate short

Aviation has been one of the fastest growing contributors to the UK’s CO2 (carbon dioxide) emissionsover the past 30 years (see Chart 1), a problem given the UK Government’s promise to cut Greenhousegas emissions by 80% by 2050. To help reduce such emissions, the European Parliament has voted toinclude aviation in the European Emissions Trading Scheme (ETS). ETS is a pollution permit scheme.Each airline is given permits allowing it to emit a maximum amount of CO2. Airlines which emit lessthan their limit can sell unused permits to other firms.

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Chart 1 - UK aviation emissions of CO2 1970 - 2005

1970 1975 1980 1985 1995 2000 200519900.0

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Chart 2 - CO2 emissions by sector

Aviationemissions

of CO2(millions of

tonnes)

Source: Defra emissions statistics

Land use change & forestry 25%

Industrial processes 3%

Other energy 10%

Other transport 2%

Road 13%

Air 2%

Building light and heat 20%

Other electricity and heat 12%

Chemicals 6%

Cement 5%

Other industry 2%

Source: SAS Cargo website

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Critics have argued, however, that the ETS might be ineffective. Independent researchers have arguedthat:

• EU aviation emissions could have grown by 25-60% between 2005 and 2012, the year whenthe full ETS comes into operation;

• even if the price of carbon (i.e. permits) in the ETS increases substantially, the currentproposal will hardly affect the growth in aviation emissions;

• improvements in aircraft technology and air traffic control must happen much quicker.

Friends of the Earth, an environmental pressure group, argues that the ETS needs to be improved by:

• issuing fewer permits to the aviation sector than are currently being proposed;• making airlines pay for all their permits instead of being given them free;• removing aviation’s unfair tax advantages (at present no VAT is paid on air fares and

aviation fuel).

On the other side of the debate, some have argued that the costs of reducing emissions could be toohigh. The Stern Report into climate change estimated that reducing CO2 emissions would have a costequivalent of 1% of GDP per year, although the report did point out that there would be businessopportunities in markets for low carbon efficient goods such as electric cars and solar panels.

As part of its drive to reduce aircraft emissions the UK Government announced an increase in AirPassenger Duty (APD) in 2007. APD is an indirect tax imposed on the airlines and passed on topassengers in higher ticket prices.

APD rates for economy class travel per passenger Previous rates New rate (from November 2009)Within Europe £5 £11Outside Europe £20 £45

Although increases in APD and the costs of buying emissions trading permits will drive up the price oftickets, the current recession is probably likely to be the biggest factor reducing the growth in air travelover the next few years.

(a) (i) Using chart 1 describe what happened to UK aviation emissions of CO2 between 1970and 2005. [2]

(ii) Why might the Government want to reduce CO2 emissions from aviation? [4]

(b) ‘The current recession is probably likely to be the biggest factor reducing the growth in airtravel over the next few years.’ (lines 28-29)Define income elasticity of demand and comment on the income elasticity of demand for airtravel. [4]

(c) (i) Distinguish, with examples, a direct tax from an indirect tax. [4]

(ii) Airlines pass most of the Airline Passenger Duty (APD) onto passengers. Using ademand and supply diagram, explain the effects of the APD on airline tickets. [6]

(d) Using the data, discuss how effective the introduction of pollution permits in aviation islikely to be in the battle against climate change. [10]

(e) To what extent might the control of CO2 emissions, in all industries, make it difficult for theUK Government to achieve its macroeconomic objectives? [10]

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SECTION B

Answer one question from this section.

2.

(a) Define cross elasticity of demand and explain, with examples, a positive and a negativecross elasticity relationship affecting the demand for cars. [8]

(b) With reference to income elasticity of demand, discuss the likely effect of the UK recessionon the demand for new and second hand cars. [12]

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(a) Define external benefits, and using a demand and supply diagram, explain whygovernments often subsidise vaccinations. [8]

(b) Discuss the view that the Government is right to make young people stay in education ortraining until the age of 18 from 2013. [12]

4.

(a) Explain possible reasons for the introduction of the national minimum wage in the UK in1999. [8]

(b) To what extent is the national minimum wage likely to cause unemployment? [12]

RECESSION HITS DEMAND FOR CARS

MINIMUM WAGE WAS TEN YEARS OLD IN 2009

FALL IN MMR VACCINATIONS LEADS TO RISE IN CASES OF MEASLES

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SECTION C

Answer one question from this section.

5.

(a) Explain how the UK recession might have been caused by a fall in aggregate demand. [8]

(b) Discuss whether cuts in interest rates are the best way to help the UK economy to recoverfrom recession. [12]

6.

(a) With the aid of a diagram, explain the shape of the long run aggregate supply curve and alsothe factors which may cause it to shift to the right. [8]

(b) Evaluate the possible effects of a government pursuing supply-side policies. [12]

7.

(a) With the aid of a diagram, explain the factors that could affect the exchange rate of acurrency such as the pound. [8]

(b) To what extent will a fall in the value of the pound help the UK to achieve itsmacroeconomic objectives? [12]

UK IN RECESSION IN 2009

UK ECONOMY WILL NEED FEWER UNSKILLED WORKERS BY 2020

UK POUND DEPRECIATES AGAINST THE EURO AND THE DOLLAR

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