2023 A-Level H2 Economics CSQ1 Questions & Answers

(a) With reference to Figure 1, compare the potential benefits for a graduate in the US with a Bachelor’s degree to a school leaver who has a High School Diploma. [2]

A graduate in the US with a Bachelor’s degree is likely to earn more than a school leaver with a High school diploma. [1]

A graduate in the US with a Bachelor’s degree is also less likely to be unemployed compared to a school leaver with a High school diploma. [1]

(b) With reference to Extract 1, and using a supply and demand diagram, explain one possible reason for the higher average earnings of graduates with a Professional degree compared to those with a Bachelor’s degree. [3]

From Extract 1, it is indicated that the marginal private cost of Higher Education is relatively high including the opportunity cost of wages forgone. Therefore, the supply of graduates with a Professional degree is likely to be lesser than those with a Bachelor’s
degree considering the high cost incurred to pursue a professional degree. [1]

This can be illustrated in Figure 1 below where S1 represents the supply curve of graduates with a Professional degree with an average earning of W1, which is higher than the average earning, W2 of those with a Bachelor’s degree with a supply curve
of S2. [2m with a correctly drawn diagram]

[Diagram]

(c) ‘Opportunity costs may make even free schooling unaffordable for some families.’ (Extract 4)
Explain one example of opportunity cost that might make free schooling unaffordable. [3]

Opportunity cost is the value of the next best alternative forgone when a choice is made. [1]
When pursuing education, a student forgoes earnings that he/she could have earned if he/she was working instead. [1]
These wages could be needed especially by lower income families to survive, resulting in poorer families finding even free schooling unaffordable. [1

(d) Explain how asymmetric information may lead to wrong choices in the market for education. [4]

Asymmetric information occurs when one party to a transaction, in this case education, has more or better information than the other party. [1]

As seen in Extract 4, consumers (parents) may not have enough information to assess the private return on an investment in their children education accurately, whereas the Education providers have more information regarding the quality of education than parents. In order to profit from the provision of education, the providers might hide some of the information they have about the quality of education from potential parents/children. [1]

Parents/children take this into consideration in the decision-making process, and tend to lower the price that they are willing to pay for education in view of the possibility that they would be getting poor quality education (inferred from Extract 4, para 4). At this lower price, good education providers are unwilling to provide their services, resulting in an education market where only lower quality education is provided. [1]

This leads to a missing market for high quality education, resulting in a misallocation of resources as Asymmetric information results in the market for education adversely selecting against higher quality education in favour of lower quality education. [1]

(e) The government of a low-income country wishes to increase spending on education. With reference to Table 1, discuss whether the government should concentrate this increase on primary education. [8]

As shown in Table 1, the “social” return from primary education i.e. the external benefits to society on the investment made in education is the highest for primary education compared to that of secondary and higher education. This suggests that the under-consumption of primary education and resultant deadweight welfare loss areas is likely to be the largest, justifying a greater degree of government intervention to correct the market failure in order to maximise societal welfare.

As shown in the diagram below, the government might provide a subsidy to producers corresponding to the marginal external marginal benefit, which would shifts the MPC downwards so that the MPC’, coincides with the MPB at Qs, the socially optimal amount where MSB=MSC, eliminating the welfare loss (as shaded) and thus increasing societal welfare.

[Diagram]

In addition, since this is a low income country, many are likely to be lacking incomes to even afford primary education and hence concentrating the increase in spending will help to make education more affordable for the masses, promoting equity, especially since education may be considered a basic human need.

However, by concentrating the increase in government spending on primary education, less will be spent on secondary and higher education. This opportunity cost includes higher value-added foreign investments, which typically require a better skilled workforce. The lack of such investments will hinder economic growth as Aggregate Demand and Aggregate Supply of the economy will not increase as significantly.

Furthermore, it is stated in Extract 1 that more tax revenue can be collected from graduates than non-graduates. Hence by “investing” in higher education, the government can earn more tax revenue in the future, which can be used to further economic growth and standard of living, for example by upgrading infrastructure.

Concluding Section:

Given that it is a low income country, it is more likely that the masses are lacking in education in the first place and therefore spending more on primary education should provide greater increase in both societal welfare as well as improvement to long-term economic growth prospects. When more receive primary education, this may then also naturally give rise to more becoming higher educated in future, which will increase the productivity and competitiveness of the economy. Finally, it should be recogised that private returns to higher education tend to make up the bulk of its benefits and should thus be mostly funded by the consumers themselves.

💡 Chief Tutor’s A-Level (H2) Breakdown: A crucial step to unlocking the evaluative judgment was careful attention paid to the question’s focus on “low-income country.”

(f) Discuss whether equity issues are more important than market failures as a reason for the government to intervene in the market for education. [10]

Equity refers to a distribution of resources that is considered fair and in particular to ensure that everyone can fulfill basic human needs. Education may be considered a such a need and low income housholds will be rationed out of the market due to the lack of purchasing power. This is because the free market fundamentally distributes resources according to dollar votes and not needs. The rich having more dollar votes than the poor, will be able to obtain relatively more education services and hence, there may be an unfair distribution of resources, resulting in inequity as well as perpetuating poverty down the generations since without education, one will continnue to be trapped in lowly paid jobs.

Hence, government intervention is justified for example by providing free education especially to the low income in order to achieve an equitable distribution of resources.

However, the market for education suffers from several market failures, including under-consumption due to positive externalities generated resulting in DWL to society as mentioned in part e). This includes reduced mortality rates and lower crime rates (enjoyed by third parties who are neither consumer nor producer of education) as mentioned in Extract 1 and 2 respectively.

In addition, consumers may underestimate their marginal private benefits from education due to imperfect information (Extract 4). Parents may only consider the benefits in terms of knowledge acquired by their children but did not consider the benefits in terms of better job prospects and higher average earnings. Hence the Actual Marginal Private Benefit (MPB) lies above the Perceived MPB. With reference to diagram below, the equilibrium quantity of education consumed is at Qp (where MPBp=MPC), which is lesser than the optimal amount Qopt (where MPBact=MPC). By increasing consumption from Qp to Qopt, Area QoptQpCB
is the additional total private benefit gained while Area QoptQpAB is the additional total private cost incurred. Since total private benefits gained exceeds the total private costs incurred, area ABC represents the welfare loss due to under-consumption as the net benefit to consumers (as well as to society) is not enjoyed.

The above are market failures, which justify government intervention.

Concluding Section:

Whether equity or market failures are the more important rationale for government intervention in education largely depends on the economic context and the level of education in question. In developed nations, basic education is largely universal, meaning the equity focus shifts primarily to tertiary education. However, market failures—specifically the under-consumption of education due to positive externalities and imperfect information—remain universally substantial regardless of a country’s development status. Hence, market failures should be a more important reason for government intervention in developed nations.

In developing nations, equity appears to be a stronger driver for intervention due to severe poverty. Yet, evaluating which is ‘more important’ may ultimately be a false dichotomy as the most effective government interventions do not treat them as separate goals. Policies such as targeted subsidies (e.g., means-tested educational grants) are highly effective precisely because they correct the under-consumption market failure while directly promoting equity, all without overstretching the government budget.

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