Explain why changes in the price of goods and services may lead to changes in resource allocation.

Examine the consequences of the lack of a pricing mechanism for common access resources.

Answers may include:

• definitions of resource allocation, market, demand, supply
• diagram of market supply and demand to show how price changes produced by shifts in supply or demand lead to changes in output
• explanation of the signalling and incentive functions of price, and how changes in equilibrium price lead to resource reallocation
• examples of markets where this has happened.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of common access resources, pricing mechanism
• diagrams to show demand and supply when there is a pricing mechanism; market failure (negative production and consumption externalities); PPC shifting inward due to loss of common access resources
• explanation of market failure of common access resources, non-excludability, diminishability, rivalry, overconsumption, lack of ownership rights
• examples of overfishing, deforestation, tragedy of the commons
• synthesis or evaluation (examine).

N.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.

Examination may include: the need for government intervention, impact on different stakeholders, consideration of the impact of government intervention, implications of resource depletion.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.

Effective answers used demand and supply diagrams to show how, for example, a rise in the price of a particular good caused by increased demand draws more resources into a market as entrepreneurs are attracted by increasing profits. High achieving answers used effective real-world examples to illustrate how this occurs.

While there were many very good answers to this question there were also some very lower achieving answers where candidates tried to answer the question without a clear understanding of what common access resources are. Effective responses focused on resources like forests and fish stocks and illustrated how their non-excludable nature leads to over-exploitation and threatens sustainability. High achieving answers effectively illustrated the consequences of over-exploitation using market failure diagrams. The ‘examine’ command term made synthesis and evaluation challenging for some candidates but it was pleasing to see answers that considered the implications of government intervention and relative importance of the effects of over-consumption of common access resources on different stakeholders.