A-LevelEconomicsThe macroeconomy9708/42 · Feb/Mar 2018 · Q120 Marks
Problems in the steel industry By 2016, China's steel industry had expanded rapidly and accounted for just over half of world production but China's economy had huge excess capacity: 30% in the case of steel which led to cheap export prices. Chinese economic growth in real terms was slowing and aggregate supply was greater than aggregate demand. Profit margins were already small but the collapse of world steel prices which fell significantly in 2015 (as shown in Fig. 1.1) worsened the situation. The dumping of cheap Chinese imports of steel caused problems for the United Kingdom (UK) steel industry. There were thousands of job losses at three major steel factories which was devastating news for UK steel workers and the regional economies. Some argued that despite this there was no case for the UK Government to intervene to save the steel factories. Steel is used in the construction industry and in the production of cars, household appliances and many other goods. Companies that use steel are much more numerous than companies that produce it. If steel prices are low, the costs of companies that use steel are reduced. So there should be no complaints or pleas for government intervention about supposedly unfair competition from cut-price imports. Industrial policy is a valid aim of government when it comes to identifying market failures. There is even a strong case for rescuing industries that face temporary external shocks, such as occurred with the United States (US) Government's rescue of Chrysler and General Motors in 2008 as the economy fell into deep recession. For steel, however, it is a buyers' market. The closure of unprofitable steel factories is not a market failure at all. It is a reflection of costs being too high and the industry being uncompetitive. Rescuing steel factories with public money would do nothing to alleviate the problem of overcapacity. It would divert scarce resources from more productive uses such as long term investment in infrastructure. [Figure 1.1: Changes in world steel price, 2014-2016]
- (a)What is meant by economic growth per capita in real terms?[4]
- (b)Explain the difference between a firm's variable costs and fixed costs. Consider which would be changed as a result of the changes in steel prices in 2015.[4]
- (c)Why is the market for steel described in the article as "a buyers' market"?[4]
- (d)Explain what is meant by market failure. Discuss whether there is any evidence in the information that the government should support the steel industry because there is market failure.[8]
This question uses a diagram from the original paper, which isn't shown here. Open the full paper from the past papers archive to see it.
Mark scheme
Marking points from the official mark scheme (Feb/Mar 2018). The mark or mark type is shown in brackets.
- [1] an increase in the amount of goods and services produced
- [1] per head of the population
- [1] over a period of time
- [1] real terms takes account of price changes
- [1-2] Variable costs change with output; fixed costs do not – and are constant in the short run.
- [1-2] Steel could affect either, depending on what it is used for but it is more likely to affect variable costs.
- [4] Steel is a key material used in manufacturing. Firms that buy steel have benefited from lower world prices (45% lower in a year). Therefore production costs are lower and product prices will be more competitive.
- On the other hand excess world supplies will continue to outstrip demand and prices could fall further.
- Excess supply, buyers have more power over market.
- [1-2] Market failure: inefficient allocation of resources – maybe due to monopoly, information failure, externalities or need for public goods.
- The case for intervention is based on the need to preserve jobs and help sustain the local economy near steel plants. In the short run the government could subsidise production until such time as world demand increases and prices of steel rise (temporary external shocks);
- The danger of foreign suppliers that undercut UK steel prices is not really a case of market failure but market forces working. Local industry costs are too high; industry uncompetitive. However, if there is 'dumping' then it can be a market failure.
- Government may fear future increase in prices leaving UK economy vulnerable to dependence on foreign steel and wish to support home industry. This is not a case of market failure.
- Also, if the steel industry is a high cost industry with overcapacity it could be unsustainable in the long run. If supported it would require public funds which would mean less spent on other projects. No real evidence for improved efficiency from this. Not really market failure.
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