2nd APR Correction

Question A

Explain why it is usually more difficult to trade internationally than domestically [8]

International trade involves transportation costs. Different currencies also involves transaction costs and risks in exchange. Protectionism such as tariffs, quotas, subsidies etc reduce free and fair competition. The world market attracts a wide range of competitors which may be a disadvantage for domestic producers. Different cultures, languages and tastes may make penetration to the market difficult.

Question B

Discuss the effectiveness of government use of maximum and minimum prices to help consumers and producers. [12]

A maximum/minimum price intends to keep prices below/above the equilibrium price. Maximum price would benefit consumers and minimum price would benefit producers. Maximum price will be ineffective if set above equilibrium price and minimum price will be ineffective if set below equilibrium price.

A maximum price will benefit those consumers who manage to buy the good but will create shortages. This requires government intervention to allocate the restricted supply to the would-be consumers but may also result in illegal, black markets that favour the richer consumer.

A minimum price will cause an excess supply that will require government action such as storage or destruction. It will benefit the producers but hurt the consumers.

Both policies conflict with the market outcome.