News Commentary Worksheet (6) –– The government builds the West Island Line

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Study the following report about the government building the West Island Line and answer the questions.

A01 Local newsDaily News11 June 2009
Budget for the West Island Line doubled due to soaring costs
The Public Works Subcommittee of the Legislative Council yesterday endorsed the MTR West Island Line project which costs over HK$12 billion. Since the material costs of construction have increased and the surrounding cultural relics need to be preserved, the estimated cost of the project rocketed from HK$8.9 billion in 2006 to HK$15.4 billion. The government subsidies even soared from HK$6 billion to HK$12.7 billion. But the MTR Corp would bear HK$0.2 billion less. The Legislative Council memberWong Kwok-hing thus urged the MTR Corp to provide more concessionary fares. However, the Highways Department said that there was no correlation between cost and concession. The construction industry estimated that the project could create 3,000 job opportunities and would facilitate the development in the Western District. The government estimated that as the West Island Line could facilitate the development of the surrounding areas, 2,500 new jobs would be created during its operation after the completion of the line. In fact, it is expected that the West Island Line could solve the traffic congestion problem in the Western District in a long run. The renewal and development of the old district could also be enhanced. It is said that a net economic benefit of HK$62 billion would be brought for the 50 years after the opening of the line.

(a)(i) What is geographical mobility of labour? (2 marks)

(ii) Explain how the completion of the West Island Line would affect the geographical mobility of labour. (3 marks)

(b)With the aid of a diagram, illustrate the impact of the construction of the West Island Line on the wage rate of the local construction workers. (4 marks)

(c)(i) What is a positive externality? Will it lead to a deadweight loss of ‘under-production’ or ‘over-production’? Why? (3 marks)

(ii) According to the report, the construction industry predicted that the project of the West Island Line could enhance the economic development of the Western District. What kinds of external benefits would be brought by the project? Illustrate your answer with examples. (4 marks)

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News Commentary Worksheet (4) Suggested answers

(a)(i) The ease (i.e., the willingness and ability) of workers to move from one place to another to work. (2)

(ii) The geographical mobility of labour among various districts of Hong Kong will increase. (1) It is because a well developed rail system will increase the willingness of workers to move. After the completion of the West Island Line, the transport will become more convenient for the workers to travel between the Western District of Hong Kong Island and other districts. Time spent on travelling can be reduced. (2) Hence, the geographical mobility of labour will increase.

(b)The construction of the West Island Line will increase the demand of local construction workers (from D1 to D2), leading to a rise in wage rate of workers (from W1 to W2). (2) Correct diagram (2)

(c)(i) A positive externality arises when the production or consumption activities produce external benefits, that is, a divergence between private and social benefits. (1) When an individual activity brings benefits to others but the individual cannot gain all the benefits from his/her individual activity (marginal private benefit is lower than marginal social benefit), the activity will be reduced due to insufficient incentives. This will lead to a deadweight loss of ‘under-production’. (2)

(ii) The external benefits brought by the construction of the West Island Line include: improving the traffic congestion problem in the Western District; enhancing the development of the tourist spots in the Western District; facilitating the business of the catering industry in the district. All the citizens, tourists and other industries will be benefited. (2) Besides, the prices of the properties along the line will increase, benefiting the property owners of the district. (2)

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