2.12 The market’s inability to achieve equity questions for IB Economics

Explain why adverse selection may cause a market for private health insurance to shrink over time.

Using real-world examples, evaluate the view that the provision of health insurance should never be left to private firms.

Using Table 1, calculate the two-firm concentration ratio (CR2) for grocery retailing in Norvaia.

Using the information provided, outline why the grocery market in Norvaia can be described as an oligopoly.

Harvest Group's total costs in 2024, including normal profit, were NVD 6 156 million. In comparable high-income countries, supermarkets typically earn abnormal profit of 3 % to 5 % of their sales revenue.

Calculate Harvest Group's abnormal profit as a percentage of its sales revenue in 2024.

Each year Harvest and Kelso decide whether to launch a price-cutting campaign on 500 staple products. Table 2 shows their estimated annual profits (NVD million) for each combination of decisions. In each cell, Harvest's profit is shown first.

Table 2: Estimated annual profits of Harvest and Kelso (NVD million)

Neither firm has run a price-cutting campaign in the last six years.

Using Table 2, identify the joint profit-maximizing outcome.

Using Table 2, show that Kelso has an incentive to move away from the joint profit-maximizing outcome.

Using a diagram and the information provided, explain how tacit collusion between Harvest and Kelso could result in a welfare loss in Norvaia's grocery market.

Distinguish between formal collusion and tacit collusion.

The inquiry also found that local planning rules make it very difficult to obtain permission to build new large stores, and that both Harvest and Kelso include clauses in contracts with major food suppliers that prevent the suppliers from selling to new supermarket chains on better terms.

Using the information provided, explain two barriers to entry in Norvaia's grocery market.

The inquiry set out the following possible policy options:

• Require Harvest and Kelso each to sell 15 % of their stores to new competitors. The legal process could take three to four years and is likely to be challenged in court.

• Change national planning rules so that new supermarkets can be built on land currently reserved for industry. Local councils oppose this, and building would take several years.

• Introduce a compulsory grocery code of conduct that bans restrictive clauses in supply contracts, enforced by an ombudsman costing NVD 6 million a year.

• Set maximum prices on 50 staple food items. Retailers warn that they would raise prices on other products and might stock fewer of the controlled items.

• Offer low-interest government loans to an overseas supermarket chain or a consumer cooperative willing to open at least 40 stores.

• Increase the maximum fine for anti-competitive behaviour from 3 % to 10 % of annual turnover.

Using the information provided and your knowledge of economics, recommend a policy the government of Norvaia could introduce to lower grocery prices for households.

Using a circular flow of income model, explain why a free market economy may result in an unequal distribution of income.

Using real-world examples, discuss the view that some income inequality created by free markets is necessary for economic growth.

Using Table 1, calculate the average retail margin per litre in 2024.

Using Table 1 and your answer to (a)(i), calculate the percentage increase in the average retail margin between 2021 and 2024.

Outline what is meant by tacit collusion.

A government report found that PetroNor, the largest retailer, usually announces its price changes on a Monday and that other retailers change their prices to match within 24 hours. Retail prices rise within a day or two of increases in wholesale costs but take several weeks to fall when wholesale costs fall.

Explain two reasons why petrol prices at different retailers may be very similar even if the retailers are not colluding.

Table 2 shows the share of petrol stations in Torvald owned by each retailer.

Table 2: Shares of petrol stations in Torvald, 2024

Using Table 2, calculate the four-firm concentration ratio (CR4).

Using a diagram and the information provided, explain how price leadership could allow petrol retailers in Torvald to earn abnormal profit.

A typical commuter buys 1 200 litres of petrol a year. Using Table 1, calculate how much more the commuter paid in 2024 than in 2021 as a result of the change in the retail margin.

Outline one reason why higher retail margins on petrol may harm low-income households more than high-income households.

The government of Torvald is considering the following options:

• Require all petrol stations to report every price change within 30 minutes to a free public website and app showing real-time prices at every station.

• Require retailers to announce price changes 24 hours in advance and keep each price for at least 24 hours, so that motorists can plan where and when to buy.

• Set a maximum retail margin of TVK 0.15 per litre.

• Ask the competition authority to investigate the main retailers for collusion, which could take three years.

• Cut fuel duty by TVK 0.10 per litre, which would cost TVK 420 million a year in lost revenue.

• Relax planning rules so that supermarkets can open petrol stations more easily.

Using the information provided and your knowledge of economics, recommend a policy the government of Torvald could introduce to promote price competition in road fuel retailing.