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Data Response - m18 - QP - 42

By 2016, China's steel industry faced significant challenges due to overcapacity and falling global prices, leading to job losses in the UK steel sector. While some argued for government intervention to save steel factories, the document suggests that the market dynamics indicate a buyers' market, where the closure of unprofitable factories reflects industry uncompetitiveness rather than market failure. The document concludes that rescuing the steel industry would not address the underlying issues and would misallocate resources that could be better used elsewhere.

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Ameer Hamza
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7 views2 pages

Data Response - m18 - QP - 42

By 2016, China's steel industry faced significant challenges due to overcapacity and falling global prices, leading to job losses in the UK steel sector. While some argued for government intervention to save steel factories, the document suggests that the market dynamics indicate a buyers' market, where the closure of unprofitable factories reflects industry uncompetitiveness rather than market failure. The document concludes that rescuing the steel industry would not address the underlying issues and would misallocate resources that could be better used elsewhere.

Uploaded by

Ameer Hamza
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1 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. Steel price in US$

500

400
US$
per tonne 300

200

100

0
2014 2015 2016

Fig. 1.1: Changes in world steel price, 2014–2016

Sources: The Times, 21 October 2015 and The Observer, 25 October 2015

(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]
PUBLISHED March 2018

Question Answer Marks

1(a) an increase in the amount of goods and services produced (1) 4


per head of the population (1)
over a period of time (1)
real terms takes account of price changes (1)

1(b) Variable costs change with output; fixed costs do not – and are constant in 4
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. (1–2)

1(c) Steel is a key material used in manufacturing. Firms that buy steel have 4
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(d) Market failure: inefficient allocation of resources – maybe due to monopoly, 8


information failure, externalities or need for public goods. (1–2)

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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