Economies of Scale, Externalities, and Tourism: An Economic Analysis

2(a)(i) Shareholders

2(a)(ii) Total Costs Increase

10,000 x 50HKD = 500,000 HKD

20,000 x 40HKD = 800,000 HKD

2(a)(iii) Profit Calculation

TR - TC = Profit

200,000 HKD

2(b)(i) Economies of Scale

Economies of scale mean that as output increases, cost per unit falls. So in Table 2A, we can observe how output increases from 10,000 to 20,000 and average cost falls from 50HKD to 40HKD.

2(b)(ii) Factors Contributing to Economies of Scale

• Bulk Buying: Can result in per-unit costs of raw materials falling.
• Division of Labor: Involves employing specialist employees to do specialist work. The production manager cannot do all of the work of the production department themselves.

2(b)(iii) Limiting Factor to Expansion

Lack of Finance: Banks may not loan money to small businesses, preventing them from expanding.

2(b)(iv) Government's Role in Encouraging Small Firms

The government should encourage new small firms in the economy as it increases employment and stimulates economic growth. For example, small firms will employ workers, thus reducing unemployment. If they grow larger, this will further reduce unemployment.

However, if the government encourages new small firms, they could have a low survival rate and limited opportunity cost. For example, the government could spend the money on large firms (MNCs) or on other factors that will increase economic growth.

Conclusion: Small firms should be encouraged if the government is sure they will survive, but sometimes it may be better to encourage established firms, especially in times of recession.

2(c)(i) Externalities Definition

Externalities = Social Costs - Private Cost

2(c)(ii) Tourism in the Seychelles: Benefits vs. Externalities

The benefits of tourism to the Seychelles outweigh the negative externalities of tourism, such as pollution and the loss of the country's culture/identity. For example, tourists may harm the environment and the reefs of the Seychelles. Nevertheless, tourism increases exports and employment. Tourists bring in foreign currency and spend it in hotels, representing an invisible export.

Conclusion: The benefits of tourism can lead to economic growth, resulting in a higher standard of living. If the costs are short-term, the problem is not significant. However, if the externalities lead to the destruction of the environment, this might lead to less tourism in the long run.

2(c)(iii) Government Intervention to Mitigate Negative Externalities

The government can use fines and taxes to reduce the negative externalities of tourism, particularly litter and airplane emissions. They can then use the revenue to fund environmental protection initiatives.