Paper 1 Practice: Solmere’s Home-Efficiency Programme
Original practice material
Solmere and all organisations, estimates and survey results are fictional. This is one 30-mark case study, not a complete Paper 1.
Case Study: Warmer homes and lower emissions
Extract 1: Private and social estimates
Many older homes in Solmere lose heat rapidly. Better insulation reduces household energy bills and may reduce pollution affecting other residents. Table 1 gives estimated present values per participating home. Benefits and costs are measured in S$ equivalent units and are directly comparable.
Table 1: Constructed retrofit estimates per home
| Retrofit | Private energy-saving benefit | Installation cost | External environmental benefit |
|---|---|---|---|
| Basic sealing | 720 | 900 | 260 |
| Deep retrofit | 1,100 | 1,500 | 300 |
The estimates exclude any distributional weight. Contractors can perform basic sealing for many more homes with the available skilled labour.
The estimates are averages. Savings are larger in poorly insulated homes and smaller where occupants use little heating. The environmental benefit depends on the fuel used to generate energy. Officials therefore cannot infer a complete marginal social benefit schedule from Table 1 alone. They estimate that 18,000 homes could receive basic sealing this year, compared with only 4,000 deep retrofits because specialist labour is scarce.
Extract 2: Information and behaviour
A survey found that some households overestimated installation disruption, while others believed exaggerated vendor claims about energy savings. Renters often pay energy bills but cannot authorise structural work; landlords who pay installation costs may not receive the energy savings. Low-income households report difficulty paying upfront even when a project offers long-run savings.
Participation in an earlier information campaign was uneven. Of households receiving a leaflet, 14% requested an audit; among households receiving an in-person explanation, 31% did so. The groups were not randomly assigned, and the latter neighbourhoods contained more owner-occupied homes. Officials therefore cannot attribute the whole difference to the communication method.
The government cannot observe each building’s true savings in advance. Certification may reduce misleading claims but requires inspectors and may delay projects.
Landlord-tenant arrangements create a further incentive problem. A landlord pays for installation but may be unable to recover the cost through rent, while the tenant receives lower energy bills. Conversely, where energy is included in rent, tenants have less incentive to conserve it. Credit constraints, information failure and split incentives may therefore coexist with the positive externality.
Extract 3: A neighbourhood heat-warning network
Solmere also plans sensors that identify dangerous indoor and street temperatures. Once data are published online, one resident’s use does not significantly reduce availability to others, and it is difficult to exclude non-payers from receiving warnings. Private firms are reluctant to finance the city-wide network through voluntary household charges.
The warning data could technically be placed behind a subscription login, but excluding non-payers would conflict with the public-health objective and would be costly to enforce. A private weather company might sell specialised alerts to businesses, while the basic city-wide warning remains non-rival over the relevant range. The network is not free to produce: public-good characteristics concern rivalry and excludability, not zero resource cost.
Extract 4: Policy choices
Officials are considering:
- a subsidy equal to the estimated external benefit of an approved retrofit;
- free information audits and vendor certification;
- grants limited to low-income households; or
- direct public provision of basic sealing in the least efficient homes.
Subsidies may go to households that would have retrofitted anyway. Audits may be inaccurate. Means testing can reduce fiscal cost but may exclude households just above the threshold. Direct provision may control quality but could be slow and poorly matched to household preferences.
The annual programme budget is fixed. Funding a universal subsidy at the proposed rate would leave less for inspections, the heat-warning network and low-income grants. Contractors warn that a rapid demand increase could raise installation prices when labour supply is inelastic. Officials will review realised energy savings after two years, but measurement is complicated by weather and changes in household behaviour.
Questions
1
(a) With reference to Table 1, for basic sealing:
(i) Calculate the household’s estimated private net benefit. [2]
(ii) Calculate the estimated social net benefit. [2]
(b) Explain why an unregulated market may provide fewer basic retrofits than is socially desirable. [4]
(c) Explain why the heat-warning network in Extract 3 has characteristics of a public good. [4]
(d) Assess whether a subsidy equal to the estimated external benefit would correct the retrofit market failure. [8]
(e) Discuss which policy, or combination of policies, in Extract 4 Solmere should adopt. [10]
[Total: 30]
Suggested use
Allow about 75 minutes and distinguish efficiency from equity throughout.