A city council in Estara is reviewing how to organise waste collection. Fig. 1 shows a simplified production possibility frontier for the council. It can us...
Question 1 Report
A city council in Estara is reviewing how to organise waste collection. Fig. 1 shows a simplified production possibility frontier for the council. It can use its annual budget and labour either to collect household waste or to maintain flood defences. Point B is currently achieved through council departments. A private firm has offered to collect waste using new vehicles, claiming that fewer council workers and lower costs would be needed for each tonne collected. The council must decide whether contracting out this service would improve economic efficiency without harming residents on low incomes.
(a) What does the production possibility frontier in Fig. 1 represent? [3]
(b) Identify which point, A, B, C or D, shows unused resources. [2]
(c) Explain the opportunity cost of moving from point B to point C. [4]
(d) Which objective, economic efficiency or equity, is more likely to be improved by contracting waste collection to a private firm? Explain your answer. [5]
(e) Explain how the government could protect households if the contracted firm increased the price charged for waste collection. [6]
Answer Details
(a) A production possibility frontier shows the maximum possible combinations of two services that can be produced using available labour, capital and budget resources fully and efficiently. [3]
(b) Point D shows unused resources. [2] It lies inside the production possibility frontier.
(c) Moving from B to C increases household waste collection. [4] However, fewer flood-defence maintenance projects can be provided. The lost flood-defence maintenance is the opportunity cost because labour, vehicles and other resources are switched from flood defences to waste collection.
(d) Contracting out is more likely to improve economic efficiency. [5] A private firm has an incentive to reduce costs to earn profit, and new vehicles or better management may increase labour productivity. Lower costs can release council funds for other services. Equity may worsen, however, if the firm charges more and low-income households cannot afford the service.
(e) Government can protect households in several ways. [6]
- Set a maximum price in the contract.
- Require service-quality and coverage standards, with penalties for failure.
- Give means-tested subsidies or vouchers to low-income households, reducing their effective price.
- Use competitive tendering, retain public provision, or regulate the firm if it has monopoly power.
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