| Date | November 2018 | Marks available | 4 | Reference code | 18N.2.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 3 | Adapted from | N/A |
Question
Solar power in Kenya
- Kenyan shopkeepers are able to use mobile phones and a small deposit to buy solar panels. This gives them 24-hour access to electricity and also lowers their fuel bills. Before this, the shopkeepers struggled to get a connection to electricity. M-Kopa is the company that provides these solar panels.
- M-Kopa estimates that 80 % of its customers live on less than US$2 a day, and without access to credit, are caught in a poverty trap (poverty cycle). Many of them rely on subsistence farming or run a small business as their source of income. Energy accounts for a significant amount of their spending.
- Kopa means “to borrow” in Swahili, and each panel the company sells is in effect a loan of about US$165. M-Kopa’s solar panels cost US$200. Clients pay US$35 upfront and agree to make a daily payment of 45¢ for a year, after which the solar panel is theirs.
- When M-Kopa’s customers are reaching the end of their loan terms, an M-Kopa representative calls to offer another product, in exchange for reopening the account and making payments for another few months. M-Kopa has sold around 325 000 solar panels so far and 50 000 of their buyers, who have already paid off their loans, have extended their credit to buy other products offered by M-Kopa. Ideally, these new products will also save customers money over time. They include fuel efficient stoves that save charcoal, a bicycle that cuts transportation costs and water tanks to store rainwater. M-Kopa also sells Samsung smartphones and offers loans to pay for school fees.
- M-Kopa is replacing kerosene lamps with solar power technology. Kerosene lamps emit a dangerous smoke that burns the eyes, irritates the throat and slowly turns walls and ceilings black. They are also expensive. According to a 2014 survey, an average household in Kenya, without access to electricity, spends about US$164 a year on kerosene. M-Kopa estimates that a customer saves about US$750 over the first four years by switching to solar panels. Given Kenya’s climate, solar power is an obvious source of energy.
- Since its commercial launch in October 2012, the company’s total revenue has risen rapidly, from US$15 million in 2014 to US$30 million in 2015, and the company says it will double this in 2016. Every day, about 600 new customers are purchasing solar panels, meaning that the company is extending loans of almost US$100 000 a day to people who might otherwise not have access to credit.
- According to a company representative, “If you take the long-term view and if you treat low-income people as customers, not charity cases, you can change the world. In our view, it is one of the advantages that foreign direct investment can bring to a country. Our customers’ lives are improved as our lives are improved”.
Define the term poverty trap indicated in bold in the text (paragraph [2]).
Define the term total revenue indicated in bold in the text (paragraph [6]).
Using an externalities diagram, explain how the widespread use of solar panels will decrease the negative externalities of consumption caused by the use of kerosene lamps (paragraph [5]).
Using a theory of the firm diagram, explain the output and pricing decision of M-Kopa if it chooses to pursue the goal of revenue maximization (paragraph [6]).
Using information from the text/data and your knowledge of economics, examine the extent to which access to credit and appropriate technology can contribute to economic development in Kenya.
Markscheme
NB drawing the poverty cycle without comment [1]. Needs further explanation for [2].
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The horizontal axis can be labelled output/quantity OR Q. The vertical axis can be labelled cost/benefit OR price/P. A title is not necessary.
Candidates who incorrectly label diagrams can be rewarded with a maximum of [3].
The use of P/C/R and Q/quantity/output on the axes is sufficient for a theory of the firm diagram. A title is not necessary.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Command term
“Examine” requires candidates to consider an argument or concept in a way that uncovers the assumptions and interrelationships of the issue.
Responses may include:
- definition of economic development
- definition of appropriate technology
- definition of access to credit (including micro-credit)
- a way to break out of the poverty trap (paragraph [2])
- access to credit allows farmers to move away from subsistence farming (paragraph [2])
- examples of access to M-Kopa solar panels, allows shopkeepers to have access to electricity, keep shops open and earn more income, which contributes to economic development (paragraph [1])
- customers can save US$750 over four years (paragraph [5])
- solar power as an alternative to “dirty” electricity (causing negative externalities)
- M-Kopa offers loans for other equipment (paragraph [4]) which would improve the standards of living, that customers otherwise weren’t able to afford, due to a lack of collateral (paragraph [4])
- buying a water tank would improve sanitation (paragraph [4])
- the company is offering loans to pay for school fees, improving education (paragraph [4])
- better health due to the reduction of kerosene use (paragraph [5])
- increasing access to credit of US$100 000 per day to people who might otherwise not have access to credit (paragraph [6])
- M-Kopa (potentially) employs locals.
Any reasonable examination.
To reach level 3, candidates must make reference to economic development, and both access to credit and appropriate technology should be addressed in reasonable depth. If a candidate only examines credit or appropriate technology a maximum of [5] should be awarded.
