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Economics
Higher level
Paper 3

9 November 2023

Zone A afternoon Zone B afternoon Zone C afternoon

Candidate session number

1 hour 45 minutes

Instructions to candidates
y Write your session number in the boxes above.
y You are permitted access to a calculator for this paper.
y Do not open this examination paper until instructed to do so.
y Answer all the questions.
y Answers must be written within the answer boxes provided.
y Unless otherwise stated in the question, all numerical answers must be given exactly or correct
to two decimal places.
y You must show all your working.
y Use fully labelled diagrams where appropriate.
y The maximum mark for this examination paper is [60 marks].

8823 – 5105
17 pages © International Baccalaureate Organization 2023

20EP01
 –2– 8823 – 5105

Please do not write on this page.

Answers written on this page

will not be marked.

20EP02
 –3– 8823 – 5105

Answer all the questions. Answers must be written within the answer boxes provided.

~(a)
1. (i) Define the term common pool resources (common access resources). [2]

. . . . . . . . . .good
is and
.common . . . . . . . . .resources
. . . . . . . . . . pool . . . . . . . . . . . . . . .a . . . . . . . . . . . . . private
. . . . .public ...........
. which . . . . . . . . . . .&. . non-excludable
. . . . . . . . . .is. . rivalrous . . . . . . . . . . . . . . .but
. . . . . . .is. . . .also
. . . . . . .scarce having
...............
. .a. . . .finite
. . . . . . . . supply . . . . . . . .goods
. . . . . . . . .These
,
. . . . . used
. . . . . . . .are unsustainably
. . . . . . . . . . . . . . . . . . . . . . .leading
.......
. . . . . overuse
. .to of
. . . . . . . . . . . . . . . these
. . . . . . . .products
. . . . . . . .. . . . . . . . . .equiviorium
. . . . . market
. . .Free . . . . . . . . . . . is
........
greater than the
socially optimal level
of output
.

(ii) The phrase “tragedy of the commons” is associated with examples of common
pool resources (common access resources). Using a production externalities
& diagram, explain the meaning of this phrase. [4]

Yo MSC
Price deadweight
cosses
M External

S
cost/Unit S = MPC

Popt X B
&

Pm XA

D= MSB = MPB
4

>
O X
Qopt am
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantity
.......
The diagram shows the negative production externality of common pool resources because of
..........................................................................
the overuse of such resources. Common pool resources is responsible for negative
.externalities
. . . . . . . . . due
. . . .to. .depletion
. . . . . . . or
. . unsustainable
. . . . . . . . . . . use
. . . of
. . resources
. . . . . . . . which
. . . . . leads
. . . . .to. .overuse
. . . . . . and
.......
overproduction (free market equilibrium is greater than the socially optimum level of output.
..........................................................................

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20EP03
 –4– 8823 – 5105

(Question 1 continued)

The following information is about Portugal’s gross national income (GNI) and
European seabass* consumption.

Table 1

Year GNI per capita (PPP US$)

2015 29 960

2016 31 607

2017 33 044

2018 34 928

2019 36 172

Table 2

Household
consumption of Expenditures
Price (euro/kilogram)
European seabass (euros, thousands)
(kilograms, thousands)

2016 3303 7.03 23 220.09

2017 4504 6.27 28 240.08

2018 5587 6 33 522.00

2019 6262 6.66 41 704.92

33522/5587 = 6

* European seabass: fish native to Europe’s western coast

(This question continues on the following page)

20EP04
 –5– 8823 – 5105

(Question 1 continued)

(iii) Using the data in Table 2, calculate the price elasticity of demand for European
seabass following the change in price from 2017 to 2018. [3]

5587 -
4504x100
. . . . . . . . . . . . . . . . . . . . . . . . .=. . 24 . . .%
. . . .04
.

........................................
. . .%
4504 24 5 58
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .04
.

. . . .=..................
.

..................................................3
- .
4 . .% .........~ .............
4 %
. . . .6-6
27 3
. . . . . . . . .x100 . . . . . . . demand
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . elustic
:
: - .

...........
. . . . .6. . 27
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-
...............
.

..........................................................................

(iv) Using the data in Table 1 and Table 2, calculate the income elasticity of demand
for European seabass when per capita incomes in Portugal changed from
2017 to 2018. [2]

. . . . .=. . . 34928-33044
.VED . . . . . . =. . . 5. .2. %
. . . . . . . . . . . . . . . . . . . . . . . . .X100 .

............................
. . . . . . . . . . . . . . .33
. .04
.........................................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .YED . . . . . . . . . . . . . =. . .4.2
. .&
D=
. . . . . . .5507
. . . . . . .4504
-

. . . . . . . .=. .24
.

. .%
. . .04
..=
LO
...........................................
..............

4504

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Turn over
20EP05
 –6– 8823 – 5105

(Question 1 continued)

Fisheries in the open sea are considered an example of a common pool resource.
According to the World Bank almost 90 % of global marine fish stocks are now either
fully exploited or overfished. Today, each person eats on average 19.2 kg of fish a year
– around twice as much as 50 years ago.

The government of a small island nation decides to impose a tax on pollock, the top
fish catch in the world, in an attempt to limit overfishing.

Figure 1 illustrates the domestic pollock market, where S is the domestic supply, St is
the domestic supply after the tax is imposed, D is the domestic demand, MPB is the
marginal private benefit and MSB is the marginal social benefit.

Figure 1

40

35 St
Price (US$ per kilogram)

30
S
25

20
16
15
14

10

5
D, MPB = MSB
0 228
0 5 10 15 20 25 30 35 40 45 50 55 60

Quantity (thousands of kilograms per year)

(This question continues on the following page)

20EP06
 –7– 8823 – 5105

(Question 1 continued)

(v) Using Figure 1, calculate the impact of this tax on the producer surplus for the
island nation’s fishermen. [2]

[6xh = 16-4xx
..........................................................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

- Pu
. . . . . . . . . . . . . . . . . . . . . . . . . . -2) . . (4
. . . . .X . . . . =. . .12x12 . . .144
.....= ..........................
..........................................................................
144 196 = 52x1000 54000
-
-
= -

A politician was quoted stating that this tax is regressive and, therefore, unfair.

(vi) Explain why this tax is regressive. [2]

. . . .A. .fisherman
. . . . . . . . . .is. .a. low
. . . . income
. . . . . . . .producer,
. . . . . . . . . .since
. . . . . indirect
. . . . . . . .taxes
. . . . . .are
. . . regressive
...........
since the poor would have a larger percentage of income being paid in
..........................................................................
taxes therefore larger burden on low income earners
..........................................................................
..........................................................................

The same politician argued that regulating the behaviour of the local fishermen would
be more effective than imposing a tax.

(vii) State one kind of regulation this island nation could adopt to decrease the risk of
depleting the pollock fish stock in its sea. [1]

.One
. . . kind
. . . . of
. . regulation
. . . . . . . .that
. . . this
. . . .island
. . . . .could
. . . . adopt
. . . . . to
. . decrease
. . . . . . . the
. . . risk
. . . of
. . depleting
. . . . . . . .the
. . .pollock
. . . . . .fish
.
stock in the sea is by increasing tax on the pollock to raise prices, which would reduce the
.misallocation
. . . . . . . . . . of
. . resources
. . . . . . . . and
. . . minimise
. . . . . . . .the
. . wastage
. . . . . . . of
. . fishes.
. . . . . .(Implementing
. . . . . . . . . . .Legislations
. . . . . . . . . and
.....
regulations - off season fishing)

(This question continues on the following page)

Turn over
20EP07
 –8– 8823 – 5105

(Question 1 continued)

It has been reported that:

y The European Union (EU) is implementing fishing quotas as part of a strategy to
limit overfishing. However, it has been reported that some EU shipping companies
catch more than their EU fish quota as they are registered in countries outside the
control of the EU. Policies instituted by governments are not effective in international
waters, where no government has legal power.
y Sustainable Development Goal (SDG) 14 is to ‘conserve and sustainably use the
oceans, seas, and marine resources for sustainable development’. However, many
governments pay subsidies that encourage overcapacity and overfishing. Global
fishery subsidies are estimated at US$35 billion annually and two thirds of that is
Regressive - used to increase fishing capacity. Efforts by the World Trade Organization (WTO) to
limit these subsidies have yet to succeed.
Tradable permitsy The lobster fishery in the United States (US) state of Maine is an example of
Carbon tax successful collective self-governance of a common pool resource. Collective self-
governance is often successful but is applicable to only some common pool resources.

(viii) Explain why collective self-governance can, under certain conditions, lead to
sustainable management of common pool resources. [4]

..........................................................................
Property
. . . . . . . .rights
. . . . . .and
. . . . technology
. . . . . . . . . . . and
. . . . .information
. . . . . . . . . . .should
. . . . . . .be
. . .given.
. . . . . . Collective
. . . . . . . . . . self
...
governance which is self regulation can lead to sustainable management of
..........................................................................
common pool resources because they implement fishing quotas, which is a
. . . .on
limit . . .the
. . . quantity
. . . . . . . . .of
. . fishing
. . . . . . .to
. . .control
. . . . . . .and
. . . .limit
. . . . over
. . . . . fishing.
. . . . . . . .Secondly,
. . . . . . . . . .by
.....
limiting
. . . . . . .the
. . . subsides
. . . . . . . . . could
. . . . . . eliminate
. . . . . . . . . .the
. . . problem
. . . . . . . . .of
. . overfishing
. . . . . . . . . . . and
..............
overcapacity to fix the shortage of fishing
..........................................................................
and wastage of resources. Thus,
collective self governance is successful because resources will be used in a
. . . . . . . . . . .manner.
sustainable ...............................................................
..........................................................................

The following information relates to the risk of fisheries being depleted around the world.
y In fishing industries around the world, taxes on the quantity of fish caught are used.
Taxes do raise revenue for governments, but if the tax is too high it may lead to
problems, such as the under-declaring of the size of the catch and increased sales
in unregulated markets. Black market
y Several countries, including New Zealand, have introduced transferable quotas
that are similar to tradable permits. Canada has also successfully adopted such a
system to control the sea scallop fishery off its Atlantic Ocean coast.

(This question continues on the following page)

20EP08
 –9– 8823 – 5105

(Question 1 continued)

(b) Using the text/data provided and your knowledge of economics, recommend a policy
which could be introduced to limit the unsustainable use of fisheries around the world. [10]

A policy which could be introduced to limit the unsustainable use of fisheries around the world
. . .be
could . . the
. . . use
. . . .of. .charging
. . . . . . .higher
. . . . . indirect
. . . . . . .taxes
. . . . .on . . fisheries.
. . . . . . . .Higher
. . . . . indirect
. . . . . . .taxes
. . . . .being
. . . . .placed
....
on fisheries
. . . . . . . could
. . . . . limit
. . . . the
. . . unsustianable
. . . . . . . . . . . .use
. . .because
. . . . . . . the. . . taxes
. . . . .add
. . . .to. .the
. . .cost
. . . .of. .production
..........
which raise the prices of fish and reduces the market equilibrium of the output of fish. This could
help. .in. .limiting
. . . . . .the
. . .amount
. . . . . . of
. . overfishing
. . . . . . . . . .which
. . . . .could
. . . . .better
. . . . .the
. . .environment
. . . . . . . . . . and
. . . .beneficial
. . . . . . . .to. .the
.
society,
. . . . thus
. . . . resources
. . . . . . . . .will
. . .be. . used
. . . . efficiently
. . . . . . . . .and . . .sustainably
. . . . . . . . . meeting
. . . . . . . the
. . . needs
. . . . . .of. .the
. . .present
......
without comprising the needs of the future generations.
..........................................................................
Higher
. . . .indirect
. . . . . .taxes
. . . . .will
. . .help
. . . .in. raising
. . . . . . government
. . . . . . . . . . tax . . . revenue
. . . . . . .which
. . . . . could
. . . . . be
. . .utilised
. . . . . .for
......
development work by developing certain fishing regulations and supporting sustainable fishing
. . . . . by
methods . . .giving
. . . . .smaller
. . . . . . fishing
. . . . . .farmers
. . . . . . a. .supplementary
. . . . . . . . . . . . income
. . . . . . .from
. . . .the
. . .tax
. . .revenues.
. . . . . . . .The
....
PED. .value
. . . . of
. . sea
. . . .bass
. . . . being
. . . . .5.58
. . . .shows
. . . . . .that
. . . it. .is. elastic,
. . . . . . .which
. . . . .means
. . . . . .when
. . . . there
. . . . .is. .an
. . increase
......
in price, there will be a fall in demand. Moreover, the YED is also elastic because the value for
. . . . .is. .4.22
Portugal . . . .which
. . . . .shows
. . . . . .that
. . . with
. . . .world
. . . . .incomes
. . . . . . . rising
. . . . .and
. . . there
. . . . .is. .going
. . . . .to. .rising
. . . . .world
......
demand for fish, which could potentially worsen the overfishing problem. The diagram below
..........................................................................
shows the indirect tax diagram as a result to control the overfishing and encourage a more
. . . . . . . use
sustainable . . . .of. .fishing.
.............................................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sz
. . =. .S. +. .T.ax
................................
Y n ,

.....
Price .....................................................................
Si
. . . . . . . . . . . . . . . . . . . . . . . . . Y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pl
..........................................................................
a

. . . . .Pl. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..........................................................................
..........................................................................
..........................................................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .>
. .X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
O
. . . . . . al
. . . . . . . . . . . . . . . . . . Q2 . . . . . . . . . . . . . . . . .Quantity
.................................
M

..........................................................................
The diagram above shows the leftward shift of the supply curve from (s1) to (s2 = s1 + tax)
. . . . . . . the
reducing . . . quantity
. . . . . . . from
. . . . (Q1)
. . . .to
. . (Q2)
. . . .and
. . . rising
. . . . . price
. . . . .levels
. . . . .from
. . . .(p1)
. . . to
. . (p2).
. . . . However,
. . . . . . . . placing
....
a. higher
. . . . . .indirect
. . . . . .tax
. . .could
. . . . .be . . regressive
. . . . . . . . .in. .nature
. . . . . because
. . . . . . . .fishing
. . . . . comes
. . . . . . under
. . . . . the
. . . primary
........
sector affecting lower income groups more than the higher income earners. Smaller firms will
. . . . . . . . . . .suffer
subsequently . . . . .more
. . . . because
. . . . . . . .once
. . . . there
. . . . .is. an
. . .increase
. . . . . . .in . .taxes,
. . . . . the
. . . smaller
. . . . . . fishing
..........
communities
. . . . . . . . . . wont
. . . . .be. . able
. . . . to
. . pay
. . . .the
. . .higher
. . . . . production
. . . . . . . . . with
. . . . lower
. . . . .demand.
. . . . . . . Consumers
. . . . . . . . . . would
....
suffer with higher prices and may turn to cheaper substitutes. In conclusion, regressive taxes
. . . . .be
could . . beneficial
. . . . . . . . in
. . the
. . . short
. . . . .term
. . . .in. .achieving
. . . . . . . .their
. . . .problem
. . . . . . .of. .overfishing
. . . . . . . . . and
. . . .obtaining
. . . . . . . .a.
sustainable
. . . . . . . . . use
. . . .of. .the
. . .fisheries
. . . . . . .but
. . .higher
. . . . . taxes
. . . . . could
. . . . . lead
. . . .to
. .problems
. . . . . . . .such
. . . . as
. . .under
. . . . .declaring
.....
of the size of the catch and increased sales in unregulated markets and it becomes hard to
. . . . . . fishing
monitor . . . . . . communities.
. . . . . . . . . . . However
. . . . . . . .the
. . .indirect
. . . . . . taxes
. . . . .could
. . . . .be. . most
. . . . .helpful
. . . . . .in. .reducing
. . . . . . . mass
..
fishing
. . . . . done
. . . . .by. . large
. . . . .firms
. . . . and
. . . .MNC’s.
.................................................

Turn over
20EP09
 – 10 – 8823 – 5105

Please do not write on this page.

Answers written on this page

will not be marked.

20EP10
 – 11 – 8823 – 5105

2. The Czech Republic is a member of the European Union (a common market) but not of the
Eurozone (a monetary union).

(a) (i) Distinguish between a common market and a monetary union. [3]

..........................................................................
. . . . . . . . . .market
common
trading . . . . . .with
. . . . . . . . .is. . .a. . . . . . . . . . .bloc free . . . . . . .with
. . . . . . . . . . . . .trade . . . . . . members
. . . . . .,
...
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .monetary
members. Whereas
. . . . . . . policies
a
common
........ . trade . . . . . . . . . with non
.............
and bank.
Union . . . . . . . . . . . . . . .a. . . . . . . . . . . . .central
. . . . . . . . .currency
common
. . . . . . .includes
. . . . . . . . . .a. . common ..................
..........................................................................
..........................................................................

(ii) Outline one disadvantage of joining a monetary union. [1]

. .One
. . . . disadvantage
. . . . . . . . . . . . . .members
. . . . . . . . . are
. . . .deprived
. . . . . . . . .of
. . independent
. . . . . . . . . . . . .exchange
. . . . . . . . . .rate
. . . . policy,
...
monetary policy.
..........................................................................
(Independances over
one disadvantage will be the loss
of sovereingly
monetary policy
. on the following page)
(This question continues

Turn over
20EP11
 – 12 – 8823 – 5105

(Question 2 continued)

The data in Table 3 show the prices of the items included in the basket of goods that
the typical consumer in the Czech Republic buys in Czech Koruna (CZK), the currency
of the Czech Republic. The quantities purchased are used as weights.

Table 3

Prices in CZK (per

kilogram)

Quantities
purchased (kg 2018 2019 2020
per year)

Rice 6 37 36 35

Spaghetti 12 35 36 35

Beef 18 208 222 228

Butter 4 171 205 152

Apples 30 30 27 34

Table 4 shows the cost of the basket of goods that the typical consumer in the Czech
Republic buys in 2018 and in 2020 in CZK as well as the consumer price index (CPI)
for 2019.

5970
Table 4
5978 r

2018 2019 2020

Annual expenditures (CZK) 5970 6274 6362

Consumer price index (CPI) 100 105.09 106 57

.

(iii) Using Table 3, calculate the expenditures of the typical consumer in the Czech
Republic in 2019. Enter your results in Table 4. [1]

5970
. . . . ./.5970
....= . .100
..............................................................
6 * 36 + 12 * 36 + 18 * 222 + 4 * 205 + 30 * 27 = 6274
. . . . ./.5970
6365 . . . . *. .100
. . .=. .106.57
.........................................................

(iv) Using Table 4 and assuming 2018 is the base year, calculate the CPI for the
Czech Republic for 2020. Enter your results in Table 4. [1]

6362x10
. . . . . . . . . . . . . . . . . . .= .
. . . . . . . .56
. . . . 106 ...........................................
..........................................................................
5970
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20EP12
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(Question 2 continued)

(v) Using Table 4, calculate the rate of inflation in the Czech Republic for 2019 and
for 2020. [2]

. . 106
. . . .57
.
. . . . 105
-
. . . 09
. . .X100
. . . . . . =. . 1. .41
.
. .%
...............................................
. . . . . 105
. . . . 09
.................................................................
.

..........................................................................
..........................................................................

(vi) Using your answer to part (a)(v), calculate the real rate of interest in 2019, given
that the nominal interest rate was 12.44 %. more than real [1]

. . . . . 12
. . .44
.. . . . .5. .09
- . .=. .7. 35
.
.
..%. . . . . . . . . . . . . . . . . . . . . . .105
. . . 09
.
. . . -100
. . . . . .x. 100
. . . . .=. 5. .09
. ........
↓
. . . . . . . . . . . . . . . . . . real
. . . . . .rate
. . . . . . . . . . . . . . . . . . . . . . . . .100
. . . . . . . inf
. . . . rate
..............

(vii) Explain two limitations of using the CPI to measure inflation. [4]

It. doesn’t
. . . . . . .take
. . . .into
. . . .account
. . . . . . .differences
. . . . . . . . . in
. . household
. . . . . . . . . .expenditure,
. . . . . . . . . . .there
. . . . may
. . . . be
...........
different types of family units (Such as elderly and youngerly)
..........................................................................
Regional
. . . . . . . changes
. . . . . . . .in
. .spending
. . . . . . . . patterns
. . . . . . . .and
. . . consumption
. . . . . . . . . . . .habits
..........................
..........................................................................
It may be too volatile, it includes food and fuel prices. In order to eliminate that
we. . .use
. . .core
. . . . inflation
. . . . . . . (without
. . . . . . . food
. . . . .and
. . . fuel
. . . .prices).
. . . . . . It
. .doesn’t
. . . . . . .include
.......................
technological advancements which are not reflected in the price.
..........................................................................
..........................................................................
..........................................................................

(viii) If in 2018 US$ 1.00 = CZK 22.72, calculate how many US dollars (US$) an
American would need in order to buy the same basket of goods that the typical
Czech consumer bought in 2018. [1]

5970/22.72
...........=
. . US$
. . . . . 262.77
........................................................
..........................................................................

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20EP13
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(Question 2 continued)

The following relates to Kenya, a country in East Africa with its coastline on the
Indian Ocean.
y Kenya experienced steady economic growth between 2014 and 2018 as real gross
domestic product (GDP) increased by an average of 5.6 % annually. In 2019, growth
slowed down primarily due to weak investment. The weakening of investment was a
result of crowding out as the budget deficit grew to 7.7 % of GDP in 2018.
y Structural reforms in the banking sector are necessary to accelerate growth.
Transforming the large number of small banks in Kenya to a small number of larger
banks would decrease lending risks and permit the larger banks to benefit from
economies of scale, potentially leading to lower interest rates charged on loans.
y Continued lack of access to credit and high borrowing costs for small and medium-
sized enterprises (SMEs) are reported. SMEs account for about 90 % of all
enterprises in the country.
y Kenya’s infrastructure is lacking. Public expenditures of almost US$4 billion per year
are required to meet the country’s infrastructure needs. The World Bank estimates
that improving infrastructure could increase Kenya’s per capita growth rate by three
percentage points.
y Taxes in Kenya amounted to 17.3 % of GDP in 2019, which was higher than the
average for African countries.
y According to the World Bank, corruption in Kenya is one of the biggest obstacles
for Kenya’s business sector, scaring away foreign investors. Public service
corruption makes starting a business very costly and complying with administrative
requirements extremely time-consuming.

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20EP14
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(Question 2 continued)

(ix) Define the term crowding out. [2]

.Crowding
. . . . . . . . . out
. . . . is
. . when
. . . . . .the
. . . .government
. . . . . . . . . . . .is. .taking
. . . . . . money
. . . . . . . and
. . . . liquidity
. . . . . . . . from
.........
.commercial
. . . . . . . . . . . banks
. . . . . . .to
. . private
. . . . . . . firms
. . . . . .which
. . . . . .increases
. . . . . . . . . government
. . . . . . . . . . . . .spending
. . . . . . . . .and
...
.reduces
. . . . . . . .investment
. . . . . . . . . . .in
. . the
. . . .aggregate
. . . . . . . . . .demand.
......................................
..........................................................................

(x) Using an appropriate diagram, explain the impact of deteriorating infrastructure

on Kenya’s potential output. [4]

YM
PPC
consumer
goody
PPC2

& XA

O
capitas good
The
. . . .PPC
. . . .diagram
. . . . . . .above
. . . . . shows
. . . . . .the
. . .impact
. . . . . .of. .deteriorating
. . . . . . . . . . .infrastructure
. . . . . . . . . . .decreasing
. . . . . . . . .Kenya’s
......
potential output from PPC 1 to PPC 2 (A to B). The productive capacity decrease and the
. . . . . . of
factors . . protection
. . . . . . . . .decrease,
. . . . . . . . which
. . . . . leads
. . . . . to
. . potential
. . . . . . . .output
. . . . . decreasing.
........................
..........................................................................
..........................................................................

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20EP16
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(Question 2 continued)

(b) Using the text/data provided and your knowledge of economics, recommend a policy to
the government of Kenya that would lead to higher investment. [10]

A policy
. . . . that
. . . .the
. . .government
. . . . . . . . . .of. .Kenya
. . . . . could
. . . . . use
. . . which
. . . . . .would
. . . . .help
. . . .in. .higher
. . . . . investment
. . . . . . . . . could
. . . . . be
..
improving government spending on the necessary infrastructure. Improving government spending on
. . . . . . . . would
infrastructure . . . . . .be. .beneficial
. . . . . . . . because
. . . . . . . Kenya’s
. . . . . . . infrastructure
. . . . . . . . . . . is
. .lacking.
. . . . . . .Public
. . . . . expenditures
. . . . . . . . . . .of
almost
. . .US$4
. . . . .billion
. . . . . per
. . . year
. . . . are
. . . required
. . . . . . . to
. . meet
. . . . .the
. . .country’s
. . . . . . . infrastructure
. . . . . . . . . . . .needs.
. . . . . The
. . . .World
. . . . .Bank
.
estimates that improving infrastructure could increase Kenya’s per capita growth rate by three
. . . . . . .points
percentage . . . . . increasing
. . . . . . . . .its
. . long
. . . .term
. . . . potential.
...........................................
..........................................................................
Infrastructure is the investment in long term productive assets which are usually done by government.
. . . . . . . . is
Infrastructure . . a. .key
. . .a. point
. . . . .in. .the
. . .economic
. . . . . . . .development
. . . . . . . . . . .and
. . . increases
. . . . . . . . foreign
. . . . . . direct
. . . . . investment
.......
(FDI).. .FDI
. . . would
. . . . . bring
. . . . .in. .investments
. . . . . . . . . .once
. . . . the
. . . necessary
. . . . . . . . .infrastructure
. . . . . . . . . . .is. .available
. . . . . . . and
. . . .lead
. . . .to. .better
.
distribution of goods to consumers for exports. FDI could also help in the weakening of investment
which. . was
. . . . a. .result
. . . . of
. . crowding
. . . . . . . . out
. . . as
. . .the
. . .budget
. . . . . .deficit
. . . . . grew
. . . . .to. .7.7
. . .%. .of
. .GDP
. . . . in
. . 2018.
. . . . . The
. . . .diagram
...
shows. . .the
. . .long
. . . .run
. . .aggregate
. . . . . . . . supply
. . . . . . shifting
. . . . . . to
. . .the
. . .right
. . . .due
. . . to
. . increase
. . . . . . . in
. . investments
. . . . . . . . . . from
. . . . foreign
...
companies.
. . . . .Yn. . . . . . . . . LRAS
. . . . ., . . . . . LRASL
..................................................
Average
..........................................................................
prive
level
. . . . . . . . . . . . . . . . . . . . . .7
....................................................
Phi
..........................................................................
..........................................................................
VPlz
..........................................................................
..........................................................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Di
......................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .>. X
..................................
O
Real upP
. . . . . . . . Ypz
. . . . . . . . . . . . . . .YPI ...................................................
>
..........................................................................
The diagram above shows the increase in the potential output from LRAS 1 to LRAS 2 which
..........................................................................
increases (Yp1) to (Yp2) subsequently reducing average price levels from (pl1) to (pl2). However, higher
investments
. . . . . . are
. . . higher
. . . . . .opportunity
. . . . . . . . . .costs
. . . . to
. . the
. . . government
. . . . . . . . . . .to. .focus
. . . . on
. . .other
. . . . .areas
. . . . such
. . . . .as
. . human
....
capital development. There are other developing needs for this country such as human capital
..........................................................................
development, export promotion and investments in the institutional infrastructure such as the banking
system. . .which
. . . . .is. .under
. . . . .developed
. . . . . . . . in
. . the
. . . country
. . . . . . .and
. . . is. . causing
. . . . . . .a. lack
. . . . of
. . investments.
. . . . . . . . . . .Moreover,
. . . . . . . . it.
could be environmentally damaging because infrastructure could have negative externalities and
. . . .could
therefore . . . . .be. . sustainable
. . . . . . . . . .development.
.....................................................
In conclusion,
. . . . . . . . .while
. . . . .investment
. . . . . . . . .in. .infrastructure
. . . . . . . . . . .is. a. .necessary
. . . . . . . . investment,
. . . . . . . . . . there
. . . . .are
. . .other
. . . . areas
. . . . . that
need to be addressed by government. However, infrastructure cannot be allowed to deteriorate and
there .has
. . . to
. . be
. . .a. renewed
. . . . . . . .focus
. . . . .on. .infrastructure
. . . . . . . . . . .development
. . . . . . . . . . .in. .order
. . . . to
. . .bring
. . . . both
. . . . domestic
..........
investment
. . . . . .and
. . . foreign
. . . . . . investment
. . . . . . . . . in
. . Kenya.
. . . . . . Thus
. . . . .higher
. . . . .investments
. . . . . . . . . . could
. . . . .be. . .brought
. . . . . . out
. . . by
.....
improving government spending on infrastructure to incentivise more investment in both domestic
. . . . . .FDI
and foreign . . . to
. . take
. . . . place
. . . . .in. .order
. . . . to
. . .achieve
. . . . . . economic
. . . . . . . . development.
...............................
..........................................................................

20EP17
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20EP18
Disclaimer:
Content used in IB assessments is taken from authentic, third-party sources. The views expressed within them belong to their
individual authors and/or publishers and do not necessarily reflect the views of the IB.

References:
1 WWF, n.d. Facts & Figures: The cold hard facts about overfishing [online] Available at: https://www.fishforward.eu/
en/topics/facts-figures/ [Accessed 30 September 2022]. Source adapted.
The New York Times, 2012. In Mackerel’s Plunder, Hints of Epic Fish Collapse [online] Available at:
https://www.nytimes.com/2012/01/25/science/earth/in-mackerels-plunder-hints-of-epic-fish-collapse.html
[Accessed 30 September 2022]. Source adapted.
European Commission, n.d. Fishing quotas [online] Available at : https://oceans-and-fisheries.ec.europa.eu/
fisheries/rules/fishing-quotas_en [Accessed 30 September 2022]. Source adapted.
Tietenberg, T., Lewis, L., 2018. Common Pool Resources. Environmental and Natural Resource Economics.
11th ed. London: Routledge.
Iied, 2016. A sustainable future for fisheries: how fiscal policy can be used to achieve SDG 14 [pdf] iied. Available
at: https://pubs.iied.org/sites/default/files/pdfs/migrate/17411IIED.pdf [Accessed 30 September 2022]. Source
adapted.
Keynes, S., Bown, C., 2019. Trade Talks Episode 116: Fish Subsidies. What’s the Catch? [online] Available
at: https://www.piie.com/experts/peterson-perspectives/trade-talks-episode-116-fish-subsidies-whats-catch
[Accessed 30 September 2022]. Source adapted.
Wilson, D., 2016. The Tragedy of the Commons: How Elinor Ostrom Solved One of Life’s Greatest Dilemmas
[online] Available at: https://evonomics.com/tragedy-of-the-commons-elinor-ostrom/ [Accessed 30 September
2022]. Source adapted.
Botkin-Kowacki, E., 2018. For Maine lobstermen, conservation and success go hand in hand [online] Available
at: https://www.csmonitor.com/layout/set/print/Environment/2018/0625/For-Maine-lobstermen-conservation-and-
success-go-hand-in-hand [Accessed 30 September 2022]. Source adapted.
2 European Central Bank, n.d. Czech koruna (CZK) [online] Available at: https://www.ecb.europa.eu/stats/policy_
and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-czk.en.html [Accessed 30 September
2022]. Source adapted.
Wankuru, Peter Chacha. Kenya Economic Update : Securing Future Growth - Policies to Support Kenya’s
Digital Transformation (English). Kenya economic update, no. 20 Washington, D.C.: World Bank Group.
http://documents.worldbank.org/curated/en/968481572468094731/
Kenya-Economic-Update-Securing-Future-Growth-Policies-to-Support-Kenya-s-Digital-Transformation.
Mwega, F., 2014. Financial regulation in Kenya: Balancing inclusive growth with financial stability
[pdf] Overseas Development Institute. Available at: https://assets.publishing.service.gov.uk/
media/57a09dd4ed915d622c001be5/9279.pdf [Accessed 30 September 2022] Source adapted.
The World Bank, 2018. Kenya: Enabling Private-Sector Participation in Infrastructure and Social Services [online]
Available at: https://www.worldbank.org/en/about/partners/brief/kenya-enabling-private-sector-participation-
in-infrastructure-and-social-services#:~:text=Kenya%20faces%20a%20significant%20infrastructure,meet%2-
0the%20country’s%20infrastructure%20needs [Accessed 30 September 2022]. Source adapted.
OECD, 2021. Revenue Statistics in Africa 2021 ─ Kenya [pdf] OECD. Available at: https://www.oecd.org/tax/tax-
policy/revenue-statistics-africa-kenya.pdf [Accessed 30 September 2022]. Source adapted.
La, M., n.d. 10 Facts About Corruption in Kenya [online] Available at: https://borgenproject.org/10-facts-about-
corruption-in-kenya/ [Accessed 30 September 2022]. Source adapted.
Table 1 The World Bank, n.d. GDP per capita, PPP (current international $) – Portugal [online] Available at:
https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=PT CC-BY-4.0. [Accessed
30 September 2022]. Source adapted.
Table 2 Eumofa, n.d. Household consumption [online] Available at: https://www.eumofa.eu/consumption CC-BY 4.0
International. [Accessed 30 September 2022]. Source adapted.
Table 3 Czech Statistical Office, n.d. Time series [online] Available at: https://www.czso.cz/csu/czso/time_series
[Accessed 30 September 2022]. Source adapted.
All other texts, graphics and illustrations © International Baccalaureate Organization 2023

20EP19
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20EP20