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This syllabus is one of a series prepared for use in secondary schools by the Curriculum Development Council, Hong Kong. The Curriculum Development Council, together with its co-ordinating committees and subject committees, is widely representative of the local educational community, membership including heads of schools and practising teachers from government and non-government schools, lecturers from tertiary institutions and colleges of education, officers of the Hong Kong Examinations Authority as well as those of the Curriculum Development Institute, the Advisory Inspectorate and other divisions of the Education Department. The membership of the Council also includes parents and employers.

All syllabuses prepared by the Curriculum Development Council for the sixth form will lead to appropriate Advanced and/or Advanced supplementary level examinations provided by the Hong Kong Examinations Authority.

This syllabus is recommended for use in Secondary 6 and 7 by the Education Department. Once the syllabus has been imple mented, progress will be monitored by the Advisory Inspectorate and the Curriculum Development Institute of the Education Department. This will enable the Economics Subject Committee (Sixth Form) of the Curriculum Development Council to review the syllabus from time to time in the light of classroom experiences.

All comments and suggestions on the syllabus may be sent to : Principal Curriculum Planning Officer (Sixth Form), Curriculum Development Institute,

Education Department, Wu Chung House, 13/F, 213, Queen’s Road East, Wan Chai,

Hong Kong.


This syllabus on Advanced Level Economics is designed for use in Hong Kong secondary schools at Secondary 6-7. It covers a two-year course leading to the Advanced Level Examination in Economics provided by the Hong Kong Examinations Authority.

The syllabus content is divided into ten topics under two main parts, part I on microeconomics and part II on macroeconomics. The chapter on “Curriculum Guide”

includes specific objectives and suggested activities on different topics. It is hoped that these suggestions could help teachers to make Economics a meaningful, relevant and interesting subject. The chapter on “Teaching Approaches and Teaching Strategies”

provides teachers with some ideas on different teaching approaches which may be helpful when teachers are designing relevant teaching activities. There are also some illustrated examples on selected topics for teachers to put into practice. Titles of useful reference books and audio-visual aids are included in the chapter “Teaching Resources”. To get the updated references, teachers must, however, keep themselves informed of new and recent developments in the teaching of Economics.


The aims of this course are :

1. to provide pupils of varying aptitudes with the basic economic knowledge and skills necessary to understand better the world in which they live;

2. to develop pupils’ analytical and critical understanding of the more important economic forces and institutions with which they will come into contact as producers and consumers, and of the interdependence of economic activities;

3. to develop in pupils an awareness of some major issues of economic policy in the local and international economy;

4. to develop in pupils the ability to communicate through the effective use of economic terminology and data.

More specifically, pupils are expected to be able to demonstrate the following abilities by the end of the course :

1. to recall the basic terminology of economics, essential facts relating to economics and economic institutions;

2. to recognize the merits and limitations of economic theories;

3. to understand and interpret economic information presented in verbal, numerical and/or diagrammatic forms using the basic concepts and ana lysis of Economics; as well as to translate such information from one form to another.

4. to apply appropriate economic concepts and analysis to economic problems and issues;

5. to distinguish facts from values, make reasoned decisions and to detect a fallacious argument;

6. to organize and present economic ideas and statements in an accurate and logical way.


Topic No .of Periods PART I

1. The scope of economic analysis 19

2. The law of demand and the theorem of exchange 48

3. Cost and supply 60

4. Government and economic organizations 26

5. The factor market 30

6. The problem of social cost 31


7. Income and employment 68

8. Money 32

9. The price level 16

10. International trade and finance 40



Syllabus Content Guidance Notes Specific Objectives Suggested Activities

1. The scope of economic analysis

(i) Scarcity and the meaning of competition (5 periods)

At the end of the lessons, pupils should be able:

(i) to explain the inter-relationship among scarcity, competition and discrimination,

Class Activities:

Given hypothetical cases with scarcity problems of various sorts, pupils are asked to suggest the possible criteria of

competition and the effects of discrimination in each case.

(ii) to distinguish free goods from scarce goods, Class Activities:

Ask pupils to make a list of free goods and scarce goods.

Discuss with pupils the problems of their classification.

(iii) to illustrate the concepts of scarcity, choice, opportunity cost and efficiency with a production possibility curve.

Data Response Exercise:

Let pupils try a data response exercise on the production possibility curve. Highlight the concepts of opportunity cost, choice, efficiency with the pupils.

(ii) Economics as an empirical science: basic postulates and methodology (8 periods)

At the end of the lessons, pupils should be able:

(i) to understand the meaning and importance of the basic postulates and the testing of hypotheses, (ii) to distinguish positive statements from normative


Class Activities:

Collect newspaper cuttings on some economic issues. Ask pupils to identify the normative statements / judgment involved in the issues.


(iii) to explain the attributes of a useful economic theory,

(iv) to understand the logical nature of a testable (refutable) hypothesis.

Class Activities:

Give pupils various examples on the fallacy of affirming the consequence and the fallacy of denying the antecedents. Discuss with pupils the logical fallacy in each example.

To sum up, ask pupils to offer their own examples on the errors in logical reasoning.

Class Discussion:

Ask pupils to give examples of tautological statements.

(iii) The meaning of utility, wealth, and income, and the postulate of

maximization (6 periods)

At the end of the lessons, pupils should be able:

(i) to explain the meaning of utility, wealth and income, (NB: wealth and income may be discussed in detail under topic 5)

(ii) to understand the importance of the postulate of maximization in deriving testable (refutable) implications,

(iii) to apply the postulate of constrained

maximization, in the interpretation of economic behaviour,


(iv) to understand that the utility maximization assumption can be tautological without specification of constraints.

Class Discussion:

Use cases like suicide or drug trafficking as examples, discuss with pupils, in the light of the utility maximization axiom, the meaning of tautological statements. Explain to pupils how the axiom can be made operationally useful.

2. The law of demand and the theorem of exchange

(i) The basic properties of indifference curves, and the money income constant demand curve (14 periods)

At the end of the lessons, pupils should be able:

(i) to explain the basic properties of the indifference curves and their implications for consumer equilibrium under constraints,

(ii) to decompose price effect into income effect and substitution effect,

(iii) to distinguish normal goods, inferior goods and Giffen goods,

(iv) to derive the money income constant demand curve,

(v) to distinguish between a demand curve and the law of demand,


(vi) to apply the indifference curve analysis in explaining consumer behaviour.

Class Activities:

Ask pupils to apply the indifference curve analysis in the following cases:

(i) buffet dinner

(ii) subsidy by kind versus subsidy by cash (iii) consumption of TV without NICAM

device under:

- an increase in income - an increase in the price of


(ii) The inverse relationship between price and quantity demanded (6 periods)

At the end of the lessons, pupils should be able:

(i) to explain and apply the first law of demand, Class Activities:

Give pupils cases with apparent upward sloping demand curves. Ask them to reconcile the law of demand with these apparent contradictions. Highlight the significance of ceteris paribus in each case.

(ii) to understand the significance of ceteris paribus in economic analysis,

(iii) to understand and apply the concepts of elasticity of demand.


(iii) Use value, exchange value, and the concept of

consumer's surplus (14 periods)

At the end of the lessons, pupils should be able:

(i) to define use value, exchange value and consumer's surplus,

Class Survey:

Choose a commodity, for example, a popular singer’s poster with the singer’s signature, and ask pupils the maximum price per unit each of them would be willing to pay at different quantities of consumption.

Give them a market price and ask for their quantities demanded or brought. Let the pupils calculate the actual payment, their maximum amount willing to pay and consumer’s surplus.

(ii) to resolve the paradox of value in terms of use value and exchange value,

(iii) to derive a demand curve from a MUV curve, (iv) to apply the concepts of use value, exchange

value and consumer's surplus in explaining consumer behaviour under different pricing arrangements.

Class Activities:

Make use of the findings in the above class survey, ask pupils to give examples on how their consumer’s surplus can be extracted.

Class Discussion:

Use membership fee, and all-or-nothing pricing, as examples, discuss with pupils the means of extracting consumer’s surplus.


(iv) Market demand, the equi-marginal principle, and the gains from exchange (10 periods)

At the end of the lessons, pupils should be able:

(i) to derive market demand from individual demand,

Class Activities:

From the above class survey, select pupils with different MUV of the same

commodity. Discuss with pupils how exchange would be mutually beneficial.

Modify the case to allow for the presence of transaction costs.

(ii) to explain the theorem of exchange,

(iii) to state the equi-marginal principle and apply it in the case of exchange,

(iv) to determine the gains from trade with/without production,

(v) to define and identify transaction costs in given examples,

(vi) to explain the role of middlemen in the presence of transaction costs in exchanges.

(v) The meaning of price as a criterion of allocation under competition (4 periods)

At the end of the lessons, pupils should be able:

(i) to explain the role of price in allocating resources, Class Discussion:

Cite consumers queueing up for rugby tickets or any other commodities as an example, discuss with pupils the implication of non-price competition and the concept of full price.

(ii) to understand the difference between money price and full price of a commodity,


(iii) to offer examples of non-price competition.

3. Cost and supply

(i) The concepts of cost, economic rents and windfall profits (Quasi-rent NOT required)(14 periods)

At the end of the lessons, pupils should be able:

(i) to apply the concepts of opportunity cost in interpreting economic behaviour,

Class Activities:

Collect newspaper cuttings with concepts of cost and profits. After teaching the relevant (ii) to explain the meaning of economic rent and

windfall profits.

topics, ask pupils to point out whether there are any misconceptions of cost and profits in the newspaper cuttings.

(iii) to understand economic rent is part of cost, Class Discussion:

Use the wage payments of popular movie stars / singers as examples, discuss with pupils the nature of these wage payments.

Apply the concepts of economic rent and cost in discussion.

(iv) to explain the implication of windfall profits for predicting economic behaviour or resource allocation.

(ii) The law of diminishing marginal productivity (4 periods)

At the end of the lessons, pupils should be able:

(i) to derive marginal product and average product from total product,

Data Response Exercise:

Provide pupils with hypothetical data of the output of a small firm in the short run.

(ii) to define the law of diminishing marginal productivity.

Ask pupils to complete the production table and present MP, AP and TP graphically.

Draw conclusion from this exercise.


(iii) Cost curves and supply curves (Isoquant analysis NOT required)(6 periods)

At the end of the lessons, pupils should be able:

(i) to identify fixed cost and variable cost from given examples,

Class Activities:

Continue with the previous exercise. Assign factor price to the inputs of the hypothetical firm.

Derive the TFC, TVC and TC schedules.

Help pupils to calculate the AC and MC in the above case.

Show the technical relationship between the cost curves.

(ii) to derive the short run cost curves,

(iii) to derive the short run supply curve of a firm from its MC curve,

(iv) to explain the shape of long run average cost curve in terms of economies and diseconomies of scale.

(iv) Resource allocation under price taking (16 periods)

At the end of the lessons, pupils should be able:

(i) to determine the wealth-maximizing equilibrium of a price taker in both short run and long run,

Data Response Exercise:

Data response exercise on the determination of the wealth-maximizing equilibrium of a (ii) to derive a price taker's short run supply curve

and short run industry supply curve, (NB: long run supply curve NOT required)

price-taking firm.

(iii) to infer allocative efficiency implications from the equilibrium of a price-taking industry.


(v) Monopoly pricing (price searching), including perfect and partial (third degree) price

discrimination (18 periods)

At the end of the lessons, pupils should be able:

(i) to determine the wealth-maximizing equilibrium of a price searcher,

(ii) to define monopoly rent,

(iii) to evaluate the allocative efficiency implication of simple monopoly pricing,

(iv) to specify the conditions and to identify cases of price discrimination,

Case Study:

Case Study on peak-load pricing of MTR/KCR as an example of price (v) to understand the effects of price discrimination

on output and allocative efficiency.


Class Discussion:

Discuss with pupils cases like differential medical charges, discount fares for pupils, varying interest rates on loans etc. to determine whether or not price

discrimination has been practiced in each case.

(vi) A simple description of oligopoly and monopolistic competition (2 periods)

At the end of the lessons, pupils should be able:

(i) to identify price rigidity and inter-dependence as the key features of oligopoly,

Class Discussion:

Discuss with pupils the pricing tactics of petro-companies in Hong Kong in the light of the features of oligopoly.


(ii) to specify product differentiation and non-price competition as the main features of monopolistic competition.

Class Survey:

Ask pupils to conduct a survey on two to three products with varying degrees of product differentiation. Tell them to tabulate the prices for each product and the major product characteristics preferred by the pupils in the class. Discuss with pupils the importance of product differentiation in affecting the market power of a monopolistic competitive firm.

4. Government and economic organizations

(i) The nature of the firm: the organization of production with the presence of transaction costs (8 periods)

At the end of the lessons, pupils should be able:

(i) to identify the possible costs of organizing production directly through the price mechanism, (ii) to account for the emergence of the firm in terms

of contracts and saving the transaction costs of using the market,

(iii) to explain the merits and demerits of some common forms of contractual arrangements and the conditions of adopting them in given


Class Discussion:

Select a few kinds of productive activities, for example, the taxi service, and ask the pupils to suggest which form of contracts will be most efficient.

(ii) Price controls and rent controls (6 periods) (iii) The implications of

non-price allocation (6 periods)

At the end of the lessons, pupils should be able:

(i) to analyse, with the aid of supply and demand diagrams, the possible effects of price and rent controls,

Class Discussion:

Group discussion on the effects of rent control on landlords, existing and potential tenants. Ask pupils to discuss the problems created under rent control and the expected market solutions.


(ii) to predict the possible behaviour arising from non-price allocation,

Class Discussion:

Discuss with pupils the economic effects of selling private housing units on the

first-come, first-served basic and by drawing lots.

(iii) to explain the dissipation of rent and the question of inefficiency under non-price allocation.

(iv) The incidence and implications of some common taxes (6 periods)

At the end of the lessons, pupils should be able:

(i) to identify direct, indirect, ad valorem, unit and lump sum taxes,


Microeconomic effects of tax changes in the budget:

(ii) to explain the meaning of tax incidence, (i) Ask pupils to find out the major tax changes in the recent budget.

(iii) to explain and illustrate the distribution of the incidence of tax between sellers and buyers under different demand and supply elasticities,

(ii) Follow up one of the tax changes by collecting relevant newspaper cuttings.

(iii) Comment on the newspaper cuttings or illustrate the viewpoints of the

newspaper cuttings with relevant economic concepts.

(iv) to analyse the effects of a tax on wealth distribution and resource allocation.

Class Discussion:

Discuss with pupils the effects of the imposition of a lump sum tax on the relative consumption of high quality and low quality wine.

5. The factor market

(i) The demand for and supply of factors (8 periods)

At the end of the lessons, pupils should be able:

(i) to define MRP and VMP and to distinguish their differences,

Data Response Exercise:

Use hypothetical data of input, output and


price to calculate the MRP and VMP.

(ii) to understand why MRP curve below the maximum ARP is the factor demand curve of a firm under a competitive factor market,

(iii) to explain the supply curve of a factor may be backward bending.

Class Survey:

Ask pupils to decide how many hours they are willing to work in a day at different hourly wage rates. Help them to construct their own individual labour supply curve.

(ii) The determination of wages in price takers' markets (2 periods)

At the end of the lessons, pupils should be able to explain how wage is determined by supply of and demand for labour in a competitive factor market.

(iii) The determination of rents (6 periods)

At the end of the lessons, pupils should be able:

(i) to define and to distinguish transfer earning from economic rent,

Class Activities:

Ask pupils to estimate the incomes of (i) A super star

(ii) to recognize rent may be earned by any factor, (ii) A doctor (iii) A taxi driver

Discuss the transfer earning and economic rent of each of them.

(iii) to understand the implication of rent on the supply of a factor.

(iv) Present value and investment decisions (14 periods)

At the end of the lessons, pupils should be able:

(i) to explain the generalized concept of capital, Class Discussion:

Relate income stream generated by an asset


(ii) to understand why interest exist, (e.g. a housing unit, a slave, a taxi, an oil well, etc.) to the price of the asset. Discuss with pupils the relationship between income and capital.

(iii) to discount an income stream of a capital asset into its present value,

Data Response Exercise:

Data response exercises on discounting.

(iv) to explain how variation in discounting variables can affect the present value of an income stream,

Class Activities:

Given income streams of three different occupations such as lawyer, singer and government clerk, ask pupils to choose their future occupations with regard to different interest rates.

(v) to understand the relationship among present consumption, investment and future consumption,

Class Discussion:

Use salted egg, dried oyster, old-vintage wine etc, as examples, discuss with pupils the meaning of investment. Ask pupils to offer their own examples as consolidation.

(vi) to define MEC and explain the relationship of interest rate and investment decision,

Data Response Exercise:

With data of future income stream and cost outlays of an investment project, ask pupils to make investment decision under certain market interest rates.

(vii) to account for the relationship among wealth, income, and interest.

6. The problem of social cost

(i) The meaning of economic efficiency and the Pareto condition (10 periods)

At the end of the lessons, pupils should be able:

(i) to define the Pareto condition, Class Activities:

Ask pupils to evaluate the efficiency of the


(ii) to understand the requirements of marginal equalities in attaining Pareto optimality,

equilibrium state of some models which they have learnt before.

e.g. One-good two-person exchange model.

Production under price-taking firms.

Monopoly with simple pricing.

Monopoly with perfect price discrimination.

Ask pupils to state the efficiency condition for the allocation in each case.

(iii) to define the characteristics of a public good, Class Activities:

Ask pupils to offer examples of public (iv) to explain the problems in the pricing and

production of public goods,

goods. Discuss with them any controversy in their examples.

Class Survey and Discussion:

Find out the MUV for radio broadcast of a few pupils. Help them to generate the

‘market demand curve’ for radio broadcast.

Discuss with them the characteristics of radio broadcast and the difficulties of MC pricing in this case. Ask pupils to suggest possible pricing arrangements to overcome the problems so that production can be retained by a private firm.

(v) to evaluate the efficiency of certain resource allocative behaviour under the presence of transaction costs.

Class Discussion:

With the existence of transaction costs, discuss with pupils the efficiency conditions of the following cases:

(i) buffet dinner consumption equilibrium.

(ii) equilibrium of exchange with / without middleman.

Show that Pareto optimality still holds in each case even without marginal equality.


(ii) Property rights and the divergence between private and social cost (21 periods)

At the end of the lessons, pupils should be able:

(i) to define and distinguish between private cost (benefit) and social cost (benefit),

Class Activities:

Ask pupils to collect newspaper cuttings showing the existence of externalities.

(ii) to explain, how the divergence between private cost and social cost affects allocation of


Ask them to explain why they think externalities exist in each case.

Case Study:

(iii) to identify the forms and problems of government intervention for correcting externalities,

Ask pupils to choose one example of externalities such as effects of smoking, use of leaded petroleum etc. for case study.

(iv) to explain the private property rights and their importance to market exchange,

Class Activities

Ask pupils to analyse the rights of a person on the flat he lives if the flat is

(v) to explain and apply the Coase Theorem in interpreting economic behaviour,

(i) bought from a private property developer

(ii) bought under the home ownership scheme

(iii) leased from the Hong Kong Housing Authority.

Class Activities:

Given the information of private and social costs (benefits) of a production process, ask pupils to work out the optimal level of output under different assignments of property rights. Ask them how the results will be affected if transaction costs exist.

(vi) to evaluate the productive efficiency of a common property resource,

Class Discussion:

Use a common property resource (e.g. ocean fish) to illustrate the dissipation of rent.

(vii) to assess the efficiency of productive activities giving rise to externalities, under the existence of transaction costs.

Discuss how the presence of transaction costs would / would not affect the efficiency of production in the above example.


7. Income and employment

(i) A brief discussion of national income accounting (10 periods)

At the end of the lessons, pupils should be able:

(i) to define some common terms used in national income accounting and explain their relationship, (ii) to understand national income measurement using

the three different approaches,

Data Collection:

Ask pupils to find out the approaches used by Hong Kong Government in estimating (iii) to understand the identity of national output,

expenditure and income in accounting sense,

GDP for Hong Kong.


On the basis of the data from “The Estimates of GDP” in Hong Kong, ask pupils to do the following in groups:

(i) plot the time series of GDP (both nominal and real) in the past ten years (ii) plot the relationship between growth

rates of GDP and growth rates of the major components of GDP

(iii) write a report analyzing the trend of the above economic variables.

(iv) to understand the merits and limitations of using national income statistics as indicators of economic welfare.

Video Show:

Show to pupils the video “Economics U$A (3) U.S. Economic Growth: What is GNP?”

(ii) An elementary Keynesian model of income

determination (11 periods)

At the end of the lessons, pupils should be able:

(i) to explain the determination of equilibrium income by the income-expenditure approach and the injection-withdrawal approach,

Data Response Exercise:

Assign pupils some data response exercise on the calculation of equilibrium national income and multipliers.


(ii) to understand the concept of multiplier and to apply different multipliers in measuring changes in equilibrium income,

(iii) to distinguish equilibrium income from full employment income.

(iii) The consumption function and its properties (8 periods)

At the end of the lessons, pupils should be able:

(i) to define and calculate the marginal propensity to consume and average propensity to consume,

Class Activities:

Extract relevant data from Hong Kong’s

“Estimates of GDP” in Hong Kong. Ask (ii) to explain the properties of the consumption

function in a Keynesian model,

pupils to calculate the APCs of Hong Kong people for the last decade. Plot the results in a graph.

Discuss with pupils the implications of the changes in APC over the past ten years.

Compare the APC of Hong Kong people with those of richer and poorer countries.

(iii) to explain some major determinants of consumption demand,

(iv) to resolve the paradox of thrift and specify its limitations.


Arrange a class debate with the following motion:

“Less developed countries should discourage saving”.

(iv) Factors affecting investment (the

acceleration principle NOT required) (4 periods)

At the end of the lessons, pupils should be able:

(i) to distinguish investment as an exogenous or endogenous variable in the income determination model,

Collection of Newspaper Cuttings:

Ask pupils to collect newspaper cuttings on factors affecting current worldwide and domestic investment expenditures.


(ii) to explain how investment is related to interest rate in an investment schedule,

Class Activities:

Make use of the information collected, help pupils to relate the viewpoints in the

(iii) to explain how investment is dependent upon expectations.

newspaper cuttings to relevant economic theories.

(v) The IS-LM model under given prices (24 periods)

At the end of the lessons, pupils should be able:

(i) to derive the IS and LM functions,

(ii) to analyse the effects of changes in factors affecting the IS and LM curves,


Ask pupils to suggest factors affecting aggregate demand and money demand.

(iii) to understand the factors determining the slopes of the IS and LM curves,

Illustrate their effects on the IS and LM curves respectively.

Class Activities:

Refer to the recent budgetary changes of the Hong Kong Government, ask pupils to identify their effects on the IS curve.

(iv) to find out the equilibrium interest rate and equilibrium national income,

Data Response Exercise:

With hypothetical data of a model, ask pupils to find out the equilibrium income (v) to explain the transmission mechanism of the

model towards reaching equilibria in both real and money markets,

and interest.


(vi) to explain how the slopes of the IS and LM curves affect the effectiveness of both fiscal and monetary policies.

Class Discussion:

Ask pupils to recommend policies to solve the unemployment problem in a

hypothetical economy.

Discuss with pupils the effectiveness of those policies suggested with special consideration given to the constraints of the policies.

At the end of the lessons, pupils should be able:

(i) to understand the different interpretations of unemployment,

(ii) to explain the causes of unemployment, Class Activities:

Ask pupils to classify cases of unemployment into different types of unemployment.

(vi) The meaning of

unemployment (3 periods) (vii) Causes of unemployment,

including the introduction of information or search theory (8 periods)

(iii) to describe how search flow and search duration determine unemployment rate,

Class Activities:

With a copy of classified post, ask pupils to select a job which each of them would like (iv) to explain the factors affecting the search flow

and duration,

to take up after graduation. Pick up a job from their choices. Find out the range of wages of that job as depicted in the classified post. Discuss with pupils the factors influencing their decisions as job seekers in searching for jobs.

(v) to define the natural rate of unemployment and full employment,

(vi) to suggest measures to deal with unemployment.


8. Money (i) The nature and functions of money (3 periods)

At the end of the lessons, pupils should be able:

(i) to explain the emergency of money with reference to transaction costs,

Role play:

Ask pupils to exchange goods among themselves and make them understand the difficulties encountered in a barter


(ii) to explain the main functions and characteristics of money,

(iii) to recognize the difficulties of defining money in the light of the emergence of near money and money substitutes.

Class Discussion:

Given examples of near money and money substitutes, discuss with pupils how well the functions of money are performed.

(ii) Transactions demand for and asset demand for money, and the Quantity Theory (10 periods)

At the end of the lessons, pupils should be able:

(i) to explain the quantity theory of money, (Fisher and Cambridge versions)

Class Activities:

Ask pupils to collect data showing the relationship between price level and money supply.

Discuss with pupils the relationship between the two variables in the light of the quantity theory of money.

(ii) to use quantity theory of money to explain the impact of a change in money supply on output and price,


(iii) to explain the transactions demand for and asset demand for money.

Data Collection / Newspaper Cuttings:

Ask pupils to collect data / newspaper cuttings on changes in interest rates and the reaction in the following sectors over a certain period:

(i) stock market (ii) property market

(iii) time deposits in the banking sector.

Class Discussion:

With information collected, discuss with pupils the relationship between interest rates and asset demand for money. Introduce the concept of portfolio choice.

Class Discussion:

Discuss with pupils how the widespread use of the Easypay System and credit cards would affect the transactions demand for money.

(iii) Measurements of monetary aggregates (various

definitions of money supply) (3 periods)

At the end of the lessons, pupils should be able to understand the concepts of different definitions of money supply.

Board Display:

Ask pupils to collect data on the money supply in Hong Kong to illustrate the definitions of money supply.

(iv) The supply of money, and deposit creation by commercial banks under a fractional reserve system (6 periods)

At the end of the lessons, pupils should be able:

(i) to understand the process of deposit creation by commercial banks under a fractional reserve system,

Data Response Exercise:

Data response exercises on the process of deposit creation with given assumptions.

(ii) to explain the meaning of and calculate the banking multiplier,


(iii) to explain how deposit creation affects money supply.

(v) A simple discussion of the effects of monetary and fiscal policies (with emphasis on income and employment) (10 periods)

At the end of the lessons, pupils should be able:

(i) to understand how monetary policies are exercised,

Collection of Newspaper Cuttings:

Ask pupils to collect information concerning how the government uses the Exchange Fund to practise the money policies.

(ii) to specify the conditions affecting the effectiveness of monetary policies,

(iii) to understand how fiscal policies are exercised, Class Discussion:

Discuss with pupils the major features of the current Annual Budget Speech and their economic implications.

(iv) to define built-in stabilizers and explain their operation.

Class Discussion:

Discuss with pupils the effectiveness of built-in stabilizers in Hong Kong.


Arrange a debate for the pupils with the motion:

“The policy of positive non-intervention is obsolete in view of the on-going economic situation in Hong Kong.”

9. The price level

(i) The concept of price level and the definition of inflation (4 periods)

At the end of the lessons, pupils should be able:

(i) to understand the nature and the calculation of price indexes,

Class Activities:

Use a CPI (eg. CPI(A)) of Hong Kong for illustration, explain the nature and

calculation of price indexes. Briefly discuss its components and weights.


(ii) to understand the use and limitations of price indexes as an indicator of changes in the price level,

Class Discussion:

Discuss with pupils the limitations of the use of CPIs. Ask them to give examples of the following aspects:

(i) quality of goods and services not taken into consideration

(ii) goods not included in the calculation (iii) substitution between goods as a result

of changes in relative prices.

(iii) to define inflation. Class Activities:

Ask pupils to identify examples of rise in prices, which by definition, are not inflation.

(ii) The causes and

consequences of inflation (6 periods)

At the end of the lessons, pupils should be able:

(i) to understand the causes of inflation, (ii) to distinguish the concepts of anticipated

inflation from unanticipated inflation, (iii) to understand the effects of inflation.

Class Activities:

With newspaper cuttings on the causes and effects of inflation in Hong Kong, analyse with pupils the following points:

(i) if the causes claimed have really led to a sustained rise of the price level of Hong Kong

(ii) some effects of inflation.



Arrange the pupils in small groups.

Ask them to write a survey report on inflation in Hong Kong in the past decade.

The following points may be included:

(i) collection of data on CPIs and money supply, apply the quantity theory of money to analyse the correlation between money supply and the price level in the past ten years

(ii) collect newspaper cuttings on the cause of inflation

(iii) conduct an expenditure and investment survey of a few families. Find out how families might have been affected by inflation

(iv) ask pupils to explain, with relevant data, the effects of inflation on:

- the distribution of wealth and income

- transfer of wealth between the public and the government.

Class discussion:

Examine the anti-inflation policies of the Hong Kong Government and discuss their effectiveness in relation to the causes of inflation.


(iii) Nominal and real rates of interest and inflationary expectations (6 periods)

At the end of the lessons, pupils should be able:

(i) to distinguish nominal rate of interest from real rate of interest,

Class Activities:

With data of the current inflation rates, deposit rates and lending rate quoted by Hong Kong banks, help pupils to estimate the real rate of interest for depositors and lenders in Hong Kong. Discuss the wealth transfer implications with the pupils.

Role play:

Ask pupils to imagine themselves as bankers and explain how they would determine the interest rate to be charged on a mortgage loan for a period of five years.

Discuss the factors mentioned by the pupils.

(ii) to understand the trade off between inflation rate and unemployment rate: the short run and long run Phillips Curve.


Interna- tional trade and finance

(i) Gains from trade: The law of comparative advantage (8 periods)

At the end of the lessons, pupils should be able:

(i) to understand the law of comparative advantage, Data Response Exercise:

Use hypothetical data to illustrate the law of comparative advantage and gains from trade.

(ii) to illustrate the gains from trade for countries with constant and increasing costs of production, (NB: offer curve NOT required)


(ii) Protectionism versus free trade: an elementary graphical analysis of the effects of tariffs and quotas (optimal tariff NOT

required) (8 periods)

At the end of the lessons, pupils should be able to understand and illustrate graphically the economic effects of tariffs and quotas.

Case Study:

Ask pupils to make a case study on textiles quotas in Hong Kong. The following aspects may be included in their reports:

(i) background for imposition of textile quotas

(ii) effects of quotas

(iii) method of allocating quotas and gains of quota holders

(iv) suggestions on alternative method(s) of allocating quotas and the effects on existing quota holders.

Class Debate:

Organize a class debate with the following motion:

“Trade protectionist measures are necessary for less developed countries.”


Ask pupils to write a survey report on:

(i) how the main exports of Hong Kong are affected by protectionism. (collect relevant newspaper cuttings if

available) and,

(ii) how Hong Kong entrepreneurs respond to these protectionist measures.

Class Activities:

With newspaper cuttings on trade protectionism, ask pupils to analyse the rationales / fallacies in the newspaper cuttings.


(iii) Balance-of-payments accounting and

adjustments (8 periods)

At the end of the lessons, pupils should be able:

(i) to identify the major components of the balance-of-payments account,

Data response Exercise:

Assign pupils some data response exercise on balance-of-payments accounting. Ask pupils to classify some examples into their appropriate accounts in the


(ii) to understand the effects of the

balance-of-payment surplus (deficit) on national income and foreign exchange markets,

(iii) to explain the means of adjusting the

balance-of-payment surplus (deficit) and the conditions affecting their effectiveness. (NB:

This topic may be discussed in detail under Topic 10 (iv) (iii))

(iv) Exchange rates: a brief discussion of fixed rates, flexible rates and the Hong Kong linked rate (16 periods)

At the end of the lessons, pupils should be able:

(i) to explain the determination of exchange rate under the fixed exchange rate system and the flexible exchange rate system,

(ii) to understand the factors affecting the exchange rate,

(iii) to understand the adjustment mechanism under the different exchange rate systems,

(iv) to compare the merits and demerits of the flexible exchange rate system and fixed exchange rate system,


(v) to understand the operation of the Hong Kong linked rate and its impact on the local economy.

Class Debate

Organize a class debate with the motion:

“Hong Kong should keep the linked rate”


Ask pupils to do a survey report on the linked rate in Hong Kong. The following sections may be included:

(i) background of introduction (ii) operation of the linked rate

(iii) economic impact of the linked rate (supplemented with newspaper cuttings).


Eight periods (40 minutes each) per week are recommended. The number of periods for the teaching, revision, activities and assessment of each topic is suggested as follows:

Topic No. of period Topic No. of period

1 (i) 5 8 (i) 3

(ii) 8 (ii) 10

(iii) 6 19 (iii) 3

(iv) 6

2 (i) 14 (v) 10 32

(ii) 6

(iii) 14 9 (i) 4

(iv) 10 (ii) 6

(v) 4 48 (iii) 6 16

3 (i) 14 10 (i) 8

(ii) 4 (ii) 8

(iii) 6 (iii) 8

(iv) 16 (iv) 16 40

(v) 18

(vi) 2 60 Total 370

4 (i) 8

(ii) 6

(iii) 6

(iv) 6 26

5 (i) 8

(ii) 2

(iii) 6

(iv) 14 30

6 (i) 10

(ii) 21 31

7 (i) 10

(ii) 11

(iii) 8

(iv) 4

(v) 24

(vi) 3

(vii) 8 68



According to Keynes, Economics is a method rather than a doctrine. It is an apparatus of the mind and a technique of thinking. Hence, effective economics teaching demands not merely factual transmission of economic knowledge/vocabulary to pupils but also the inculcation in pupils the unique economic reasoning of the discipline as well as the ability to apply economic theories to analyse economic problems in their socio-economic surroundings.

As shown in Chapter 2, the present CDC Advanced Level Syllabus also shares similar aspirations.

Yet, the above alleged aims of economics teaching are not easy to achieve. Firstly, Economics as an academic discipline is theoretical and abstract. Grasping economic reasoning requires pupils to think in abstraction. Hence, it is not surprising that most pupils regard Advanced Level Economics as difficult and unrelated to their daily life experience.

Another problem arises from the contention of different schools of thought in the discipline.

In addition, politicians and economists may also have different views on policy issues.

Thus, a sixth form pupil may find it confusing to juggle with conflicting arguments posed by different parties.

Furthermore, the traditional teaching approach to economics may not be able to fully achieve the above aims of economics education. The traditional approach is usually a didactic one under which pupils are being told (by a lecture, a film or through reading) the specific economic knowledge. The teacher prepares all the teaching materials, presents the teaching points and structures the lessons in such a way that pupils can easily compile a complete set of notes for memorization. The communication flow is a unidirectional one from the teacher to the pupils. Actually, pupils are expected to be only passive learners.

Such didactic approach which is very time efficient and systematic would certainly facilitates rote memorization. However, it is not too effective in encouraging critical and analytical thinking. Neither does it help to develop pupils’ ability to apply economic concepts to daily life problems.

Hence, it is no surprise that overseas research findings indicate that educational experiences seem to bring about only very limited changes in the way of thinking about the economic environment. That means, teaching does not have a lasting effect on pupils’

perception. Pupils who are quite successful in the examination hall may still retain layman’s perception of their economic environment. Suchman’s learning/thinking model(1) also points out that teachers can control the classroom but it is the pupils who ultimately control their own learning.

Perhaps it is a good opportunity to take the chance of the present syllabus revision to consider how the aims of economics teaching can be achieved by adopting appropriate teaching approaches and strategies. Apart from the traditional didactic approach, two other approaches, namely the diagnostic approach and the inquiry approach, are found relevant for economics teaching at sixth form level in Hong Kong.


know about certain concepts and skills. On the basis of this information, teachers can work towards expanding their understanding or skills or correcting misunderstandings. Teaching can then be designed in such a way to meet the needs of the pupils and to restructure pupils’


For instance, diagnostic teaching can be used at the beginning of a teaching unit to elicit pupil response. Provocative questions such as “What is meant by inflation?”, “What causes inflation in Hong Kong?”, “What is cost?” or “Is there a labour shortage in Hong Kong?” can stimulate thoughts. Attitude or knowledge surveys, brainstorming or questioning may be adopted to find out how much pupils already know about certain concepts or topics. As layman’s understanding of concepts such as inflation, cost, shortage, etc. may be very much different from economic understanding, the teacher can then take appropriate strategies to remedy misconceptions before proceeding with further materials.

Diagnostic teaching can also be used as an assessment device such as pre-test of a programmed learning unit to discover what the pupils already know.

In small group projects, problem solving sessions, or group discussions, the teacher can organize a debriefing session so that pupils can report the results of their work to the rest of the class, to clarify their ideas and to comment and question each other’s work. Diagnosis and remediation can be achieved through teacher- guided discussion or pupils sharing of ideas.

The role of the teacher in diagnostic teaching is important. The teacher is both a diagnostician and learning director. By means of questioning, the teacher pushes pupils to expose the knowledge they already possess and examine how they themselves acquire knowledge. The teacher may then challenge pupils’ concepts and knowledge by asking thought-provoking questions or providing counter-examples. The aim is to modify the way pupils perceive meaning from the world and also restructure the knowledge possessed by them.

Inquiry learning approach emphasizes active pupil participation in the thinking/learning process so as to learn through personal discovery or problem solving. Inquiry learning can be based on teacher-guided activities or it can be based on pupil initiated projects. The ultimate purpose of this approach is to develop an autonomous inquirer who has the motivation and ability to learn on his/her own.

Inquiry can be deductive or inductive.

Deduction is the process of drawing logical conclusions from a concept, generalization or theory. For example, the teacher may ask pupils to infer implications from theories and definitions or make predictions through logical reasoning based on concepts.

Inductive inquiry is the process of generalizing from given facts. The stages of (1) observation, (2) classification of observations, (3) forming hypotheses, (4) verification of hypotheses and (5) forming generalizations, are necessary.


(1) Helping pupils to form concepts out of given information.

(2) Interpreting data (finding out the similarities and differences, drawing conclusions or hypotheses).

(3) Applying principles in real/hypothetical situation.

To sum up, the didactic, diagnostic and inquiry approaches vary in the degree of teacher control and pupil participation, with the greatest teacher control in teaching/learning under the didactic approach and the highest degree of pupil participation under the inquiry approach. Obviously, the didactic approach is least conducive to developing analytical thinking required by the discipline. Yet, it is not without a merit. Such an approach is still commonly found in classrooms because it is time efficient. The teacher can cover a lot of teaching points in quite a short period of time. On the other hand, the inquiry approach, though found to be more desirable in developing the skills of economic reasoning, is time-consuming.

In fact, more than one approach can be used in teaching Advanced Level Economics.

Topics of varying complexities may be treated differently at different times. A group of economic educators in USA also consider variety as a very important factor in determining the success of economics teaching. (2) They suggest that it necessary to intersperse theories with practice so that pupils can make meaning out of their own economic concepts and theories. Theories can be introduced by any of the three approaches and pupils are given the opportunities to practise using the theories on economic problems, for example, through survey, data response exercise, case study etc. Feedback and evaluation of pupils’ progress is important as pupils can know their own achievement. Above all, the sense of achievement is a very strong motivator of learning especially if we want to develop pupils to be autonomous inquirers.

To complement the adoption of different approaches, a variety of activities or teaching strategies can be used in the classroom. These activities provid e chances for pupils to work on their own, to apply their economic concepts, to develop a critical attitude and, above all, to increase the interest of the lessons. The following suggests some useful strategies/activities which can be adopted in classroom. Most of them have been incorporated in the curriculum guide. It has to be stressed that the strategies/activities listed below are not exhaustive.

Teachers are free to adopt other strategies which are found useful to them.


Discussion, similar to guided inquiry, is commonly used in sixth form teaching. It is especially useful in helping pupils to apply the theories to interpret the real world economic phenomena. The classroom discussion technique is based on the belief that knowledge resides within the pupils participating in discussion. Pupils can learn from the effect of relating new data to their current economic knowledge. The role of a teacher is not to impart knowledge but to stimulate the knowledge pupils already possess and create a situation that encourages pupils to find the relations among ideas. The teacher may help the pupils to interpret their own experiences through appropriate questions and suggestions.


discussion. Throughout the lesson, the teacher has to keep the discussion on target. Any irrelevant questions raised by pupils side-tracking the discussion should be ignored for the time being. The teacher has to encourage all pupils to participate actively in discussion.

There must be even chance for pupils to express their ideas. Responses of pupils have to be audible and understandable. Furthermore, the teacher can ask probing questions following pupils’ responses in order to stimulate the pupils to re-examine their ideas or to clarify any ambiguity of the responses. This will encourage pupils to think through their responses more thoroughly. Finally, a good discussion session must be concluded by either consolidating the parts of discussion into coherent whole or providing thought-provoking questions as a follow-up stimulant.


Brainstorming is a technique which encourages pupils to react to a controversial question or problem by giving any idea that comes to mind in a very short period of time, say five to ten minutes. Criticism or evaluation of these reactions are not allowed in the stage of brainstorming. Brainstorming can be conducted for a large group, small groups or on individual basis.

Such technique can be used in two different situations. First, as an “opener” of a topic by eliciting responses from pupils. Teacher can then determine what pupils already know and what their attitudes are toward a topic. Second, brainstorming can be used for problem solving. For example, pupils can have a brainstorming to identify the causes of a particular problem (such as inflation) or the consequences of attempting a particular solution.

After the brainstorming session, the teacher or the pupils themselves can process the brainstormed ideas to make generalizations or identify concepts.


Pupils at sixth form level may also be required to conduct and report an inquiry on a topic or an economic issue.

There are two main ways to carry out project inquiry by pupils. One way is to divide the class into several groups and each group is designated to collect information about one particular aspect of a chosen topic. After a certain period of time and information has been collected, each group works to sort out and collate what has been discovered with the help of the teacher. Then the teacher may help to bring together all the information collected by organizing a reporting session for pupils to explain their findings to the class or arranging board display, class display, etc. Hence, different groups can look at each other’s work.

This method is more suitable for projects of a large scale.

Another way of conducting project is to ask pupils, either in groups or on individual basis, to present the findings in the form of a survey report.


presentation skills. However, the prerequisite of success requires the topic chosen to be manageable and the survey/inquiry to be guided by the teacher. If possible, pupils can first formulate econo mic hypothesis to be tested by the project before proceeding to collection of data so that they have a clear focus of what is to be found from the inquiry.

Problem Solving Exercises

The aim of problem solving exercises is to give pupils an insight into the nature of decision- making under different circumstances. In addition, they provide pupils with the chance to apply their economic knowledge in hypothetical situations.

Teachers can provide pupils with hypothetical problems which they have to solve by manipulating certain data. These exercises involve anticipating and evaluating the likely outcomes of various courses of action.

The problems to be tackled can be built on real situations within the experience of the pupils, for example, a problem solving built upon a visit to a factory. Besides, teachers can create hypothetical situations with the help of statistical data, pictures, graphs, recordings, case studies, etc.

Successful problem solving depends on the choice of topics and proper structuring of suitable resource materials for use by the teacher so that relevant economic principles can be learned inductively through the study of the resource materials.

Unlike pupils at tertiary level who are expected to work on their own, more guidance and participation by the teacher is required at sixth form.


If the class size is small or the time allocation is adequate, small group tutorial work is a highly desirable alternative to classroom teaching.

Tutorial has an important characteristic. Work is prepared by the pupils for discussion with the teacher. Tutorial can be subject-centred or learner-centred. It provides a good opportunity for active learner participation. Teacher can discuss with pupils any problems arising from what has been taught or they have come across in reading. Teacher can also ask pupils to prepare small scale survey of a topic of interest or clarify key concepts in the form of worksheet/case study, etc. Brainstorming, problems solving exercises and other strategies may also be used in tutorial.

The effective utilization of tutorial sessions requires careful teacher planning to choose a suitable theme for discussion or pupil presentation. Active participation has to be encouraged and pupils should be given sufficient time for preparation.


pupils to develop a surer and deeper understanding of the economic concepts with active participation in the learning process.

Concluding Remarks

In conclusion, there is no simple panacea of effective economics teaching at sixth form level.

Experience of economics educators reveals that greater effectiveness of teaching is closely related with careful teacher planning before the lessons. Active teacher diagnosis of the subject requirement and pupils’ ability and interest seem to be the prerequisites to improving the quality of teaching. With such understanding, the teacher can then select a variety of teaching approaches and strategies at different times subject to constraints like the requirements of the topics, teaching time and resources available.

Furthermore, the teacher has to review the successfulness of his/her teaching from time to time by evaluating pupils’ progress and achievement. Such review provides feedback on the suitability of the teaching approaches and strategies adopted. Whenever necessary, the teacher can modify his/her way of teaching. In short, the teacher is the director of learning but he/she is also the learner within the classroom.

Note :

(1) According to Suchman’s learning/thinking model, pupils are not passive recipient of knowledge. Instead, when the learner gets in contact with some new experiences, the learner’s state of mind will determine how and which of the new experiences will be perceived and retained. The learner’s own theories of thinking, framework of the world as well as motivation form one’s state of mind.

(2) Suzanne W. Helburn and James E. Davis, Preparing to Teach Economics : Approaches and Resources, Social Science Education Consortium, Inc., 1982.


This Chapter consists of a few suggestions on how selected topics in the syllabus can be taught. These suggestions illustrate how a variety of teaching activities/resources such as brainstorming, discussion, problem solving exercises, case study, survey, cartoon illustrations and concept map can be used in an integrated manner to achieve specific objectives. These suggestions only serve as examples of implementing the “Teaching Approaches and Teaching Strategies” rather than ‘model lesson plans’ for teachers to follow.


Topic: Cost and economic rent

Teaching Materials

Extracts from newspaper cuttings and a hypothetical case Objectives:

At the end of the lessons, pupils should be able to:

(1) define cost as the highest valued option forgone.

(2) distinguish explicit cost from the full cost of an action.

(3) distinguish sunk/historical cost from opportunity cost.

(4) understand that sunk cost has no effect on choice of options.

(5) define economic rent.

(6) understand economic rent is part of cost.

Suggested Teaching Approach:


To motivate discussion, pupils are shown the cartoon picture in resource material 1.1 (RM 1.1).


Pupils are asked to suggest reasons for the 'richness' of the taxi-licence holder.

Guided discussion on a hypothetical case

Teacher then turns pup ils' attention to a hypothetical case: part A of the story of Ah Kwai.

(RM 1.2 to 1.3)

Teacher then asks pupils to consider the following questions:

-- How much did Ah Kwai pay for his taxi licence?

-- What was the explicit cost of acquiring the taxi licence by Ah Kwai?

-- Was it the opportunity cost of owning the taxi licence by Ah Kwai in 1982? Why or Why not?

With additional information in part B, let pupils discuss whether Ah Kwai should or should not continue his ownership of the taxi-licence.

Concepts development

Then the teacher introduces the concept of sunk cost to the pupils.

The teacher analyses Ah Kwai's possible decisions in terms of opportunity cost.

The teacher concludes that sunk cost is historical cost and should not affect a current economic decision. His decision would not change unless the value of his best forgone alternative of owning a taxi licence had changed.


have made enormous 'profit' by selling the licence.

Concepts development

The teacher introduces the concept of economic rent.

The teacher asks pupils to explain Ah Kwai's decision in terms of opportunity cost.

The teacher explains to pupils that Ah Kwai's possible gain is economic rent which is a cost, not profit.

Suggested Teaching Time 2-3 periods

Further Development

With additional information from the newspaper, and modification of the hypothetical case, teachers can further pursue the case to teach expected gain and windfall profits.


Part A

Ah Kwai successfully bought a taxi licence in 1982 at a price of $200 000. He operated the taxi himself and derived stable income. He expected the price of taxi licence to go up in succeeding years.

Part B

But contrary to his expectation, the price of taxi licence dropped in 1983 and 1984.

Part C

Ah Kwai continued to hold the taxi licence. In Dec. 1991 his friends persuaded him to sell his licence at a price of $1 550 000 convincing him that he would gain a profit of HK$1,350,000.


Average price of an urban taxi licence in government tenders


No. of Licences Issued


tender price ($) % of change

Feb 82 300 178,646 +4.0

June 300 183,023 +2.5

Sept 300 206,550 +12.9

Dec 300 182,674 -11.6

May 83 301 160,758 -12.0

July 301 143,864 -10.5

Oct 300 133,901 -6.9

Jan 84 300 140,221 +4.7

Apr 300 157,182 +12.1

July 300 164,886 +4.9

Jan 85 100 199,255 +20.8

June 100 219,771 +10.3

Jan 86 100 292,026 +32.9

June 100 372,042 +27.4

Jan 87 100 449,640 +20.8

July 100 597,122 +32.8

Feb 88 168 600,886 +0.6

July 100 694,443 +15.6

Sept 89 200 820,545 +18.2

Dec 90 150 909,562 +10.8

Dec 91 200 1,510,000 +66.0

(From newspaper cutting)


Topic: The problem of social cost

A Case study: A case of externality - Lead in Petrol


At the end of the lessons, pupils should be able to:

(1) define external cost.

(2) identify the private costs, external costs and social costs of an action.

(3) explain how the divergence between private and social costs leads to inefficient allocation.

(4) suggest some traditional measures for correcting externalities.

(5) make comments on these measures.

Suggested Teaching Approach Introduction:

The teacher introduces the concept of external cost to the pupils.

Class discussion:

The teacher asks pupils to bring news cuttings about externalities to the lesson. Then they are required to explain why they think externalities exist in each case.

Class study:

To arouse attention, pupils are given a cartoon picture RM 2.1 showing the external effect of lead in petrol.

With additional information, RM 2.2, let pupils discuss the questions that follow.


In conclusion, explain to pupils that it is costly and also usually inefficient to reduce externalities by government intervention, though these measures are still in practice.

Suggested Teaching Time 3-4 periods

Further Development

Based on the comments on the traditional treatment of externalities, introduce Coase's view on this issue.



Lead is added to petrol with an aim of increasing the performance of car engines. Lead, however, goes into the atmosphere through vehicle emissions. It is believed that 95% of the lead content in air is resulted from car exhausts.

Lead affects cell and body processes. It can affect the brain, heart and kidneys. Studies show that lead does more harm to young children, with likely neuro-psychological effects.

In order to safeguard the health and well-being of the community, some governments have asked the petrol companies to produce unleaded petrol (ULP). The companies, however, were not in favour of this since it would involve them an enormous amount of money.

1. What are the external costs of using lead in petrol?

Why do you think these are external costs?

2. Why don't petrol companies consider the external costs of their decision to produce petrol with lead added to it?

3. What are the means a government can use to encourage petrol companies to reduce the production of petrol with lead? Explain your answer.

4. What does the Hong Kong government do to discourage the consumption of petrol with lead?

5. What are the possible difficulties that the government will encounter in using the measures in (3) and (4)?




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