Question

‘Mauritius declared a "state of environmental emergency" on August 7, 2020 after Japanese-owned cargo ship MV Wakashio ran aground on a coral reef, leaking 1,000 tons of oil onto pristine coasts. The island blue economy became a trash economy overnight. The oil from the ship threatens sea life already imperiled by climate change. In the same vein, according to marine ecologist from Mauritius, Fishermen community too, will suffer the consequences for years to come. This devastating oil spill has even poisoned fish and can even make humans sick if consumed.

In a similar way, it also deepens wounds in a tourism industry hurting from the pandemic. In fact, tourism provides jobs for an estimated 1 in 5 of its workers.

But the industry collapsed after the government cut the island off from the rest of the world to protect it from the corona virus pandemic. For shuttered hotels and restaurants, an ecological disaster on top of that might now be too much to bear.

Use appropriate supply and demand diagrams to analyse the effects on the market equilibrium price and quantity traded of fish, following:

Price elasticity of demand (PED) & Income Elasticity of demand (YED) is an important tool for private firms. It helps in decision making.

(a) Explain how a Hotel manager can use the concept of price elasticity of demand and   income elasticity of demand in this low season.                            

(b) Evaluate economic policies that the government of Mauritius can adopt to increase economic growth.                              

Answer 1

(a) A hotel manager in this slow time of business should reduce the prices of hotel room rent. Also the cost of food items in the hotel should be reduced at the times when business is so low. This will help the industry which is price elastic, to survive as this will increase the demand. Also since the income of consumers at this time is low, lowering down of prices will increase the demand.

(b) Government can make use of following policies to increase economic growth:

1. Price ceiling: Government should make sure that prices of certain goods are fixed so that the demand by the consumers of the good will increase and lead to growth in the economy.

2. Government should offer subsidies to the producers of goods. This will reduce the prices of the goods and lead to increase the production and consumption activity in the economy.