IB Economics HL 1.1 What Is Economics? Question Bank

Outline why purchasing this surplus implies an opportunity cost for the government of Nissos.

Study the extract below and answer the questions that follow.
EU court rules minimum price for cigarettes illegal

(1) The European Court of Justice has ruled that Ireland cannot impose a minimum price on cigarettes. It said that member countries would have to find other ways to combat smoking. This could be achieved by increasing indirect tax on tobacco, but imposing a minimum price would distort fair competition in the market. The ruling is designed to maintain the freedom of manufacturers and importers to benefit from lower costs and greater efficiency.

(2) The judgment said the aim of ensuring that tobacco prices are high can be "adequately" achieved by increasing tax, since any indirect tax rises are, sooner or later, reflected in an increased retail price, without removing the freedom of manufacturers to set prices.

(3) The Irish government had claimed that it needed to fix a high minimum price to discourage smoking. This followed government legislation to ban tobacco advertising and promotion in July 2009. According to a spokesperson from the anti-smoking group ASH (Action on Smoking and Health), this measure helped to prevent retail outlets from making young people feel attracted to buying cigarettes. "Close to 30 % of our population still smoke and 7000 die from tobacco-related disease each year," he said.

(4) It has been argued that increasing the price of cigarettes is one of the most effective ways of curbing harmful smoking and there is a need to make cigarettes less appealing, particularly to young people. The evidence is that banning advertising, introducing minimum pricing and increasing health warnings can all work.

(5) The head of a major retail organization has attacked the idea of minimum pricing for cigarettes. He argued that artificially fixing a minimum price would not be effective. Also, since the demand for tobacco is inelastic, raising the price would not work. Moreover, it was against the free market for a government to set prices for any product available to consumers, limiting their freedom to choose.

Define the following terms indicated in bold in the text:

free market (paragraph (5).

Study the following extract and answer the questions that follow.
Fiji's challenges and opportunities

(1) In 2016, the island nation of Fiji suffered from cyclone Winston (a tropical storm), costing more than 40 lives and damaging its infrastructure. One of the country's four sugar mills was severely damaged, harming raw sugar processing. Processed sugar is, in addition to bottled water and tourism, a major export in Fiji. A recent study found that the damage from the cyclone continues to have a lasting effect on communities as fisherwomen report fewer and smaller crabs and fishes. The social safety net is limited and there are calls for the government to help the citizens who have been affected by the cyclone. However, the government had to use its budget to rebuild infrastructure.

(2) The government has prepared several strategies to strengthen the economy. These include financial support for sugar cane producers, diversification of its agricultural produce, better access to finance and encouragement of investment. The government has committed to provide equal opportunities for all: promoting the participation of women in education and political leadership, because Fiji has one of the lowest female participation rates in politics in the world.

(3) To support its sugar cane farmers, the government provides a 55 % subsidy on pesticides (products that kill weeds) used in farming. However, small farmers are complaining about the excessive paperwork that needs to be completed to receive the subsidy and there is potential for corruption. Fiji competes with Brazil, which has an absolute advantage, in the world market for sugar.

(4) To diversify, the government plans to expand the ginger and coconut industries. Both industries are economically and environmentally sustainable. The industries provide an increased number of Fijians with a worthwhile income. Coconut production plays a very important role in Fiji's economy, particularly in the more isolated rural communities, where formal employment is scarce and where alternative cash crops (crops grown to be sold for profit) do not exist. Coconut is a staple food and is vital for food security (ensuring that people have access to enough food), but is also important for health, economic and cultural reasons. New market opportunities have emerged in high-value products - green coconut products, such as coconut water, are becoming increasingly popular throughout the world.

(5) The Asian Development Bank encourages Fijian farmers to access "green finance". These financial investments support economic development through sustainable development initiatives and policies. Under the government's new reforms, farmers are able to use assets such as crops and contracts as collateral for loans, creating improved access to finance. However, to increase incomes, farmers will also need to improve their financial knowledge.

(6) To create an investment-friendly environment, the government must develop more infrastructure, create market access through greater economic integration and reduce asymmetric information between farmers and wholesale buyers. Australia has decided to help Fiji by financing infrastructure through grants and concessional loans.

Using a production possibility curve (PPC) diagram, explain how damage to Fiji's infrastructure has affected its production possibilities (paragraph 1).