Chapter

2
The Three Basic
Economic Problems and
Private Property Rights
O
T
2.1 The Three Basic Economic Problems A
IS
2.2  ow Do Different Societies Tackle the Basic
H
Economic Problems?
2.2.1 By Customs and Traditions e-Learning Hub
2.2.2 By Government Decisions
R

2.2.3 By the Market Mechanism

2.2.4 In Reality: Mixed Economy

2.3  elationship between Specialisation, Exchange

R
A

and Private Property Rights

2.3.1 Specialisation
2.3.2 Exchange
2.3.3 Private Property Rights
In Chapter 1, we learnt what
scarcity is and we know that
it is the source of all economic
problems. In this chapter, we
will study three problems that
people encounter under scarcity
and how different economies
tackle them. We will study
the relationship between
specialisation, exchange and
private property rights, and
discuss why private property
rights are crucial for a market
economy.
 Chapter 2

2.1  The Three Basic Economic Problems

Brainstorm 2.1
1 If you owned a farm in Hong Kong, what would you grow on the farm? Would
it be possible for you to grow all kinds of crops you wanted on the farm? Why?
2 Scan the QR code and watch a video to learn more about the three basic
Flipped
economic problems. Classroom

Resources are scarce relative to human wants. To satisfy their wants,

people need to decide how to allocate scarce resources. In every society,
people need to consider three basic economic problems when they
allocate resources and distribute goods. They are:

what to produce;

O
how to produce; and
for whom to produce. T
A What to produce?
IS
The problem of ‘what to produce’ refers to making choices about the
kinds and quantities of goods to produce. People cannot produce all the
goods they want due to the problem of scarcity. With limited resources,
they need to decide what kinds of goods to produce and their quantities.
R
A

Figure 2.1  A bakery needs to decide whether to produce more cakes or more egg
tarts with a limited number of eggs.
Example

Machines and raw materials in a garment factory are limited.

When the factory owner chooses to produce more women’s
clothing, fewer resources (i.e. machines and raw materials) will be
available for producing children’s clothing. As a result, the amount
of children’s clothing produced will fall.

44 basic economic problem  基本經濟問題

 The Three Basic Economic Problems and Private Property Rights

B How to produce?
The problem of ‘how to produce’ refers to making choices about the
methods of production. After deciding what to produce, people need In the past
to decide what kinds of resources and the quantities to use to produce
goods and services. Mei Ho House (美荷樓), a public
housing block built in the 1950s,
was recently graded as a historic
As resources are scarce, people usually adopt methods of production building in Hong Kong. The
which incur minimum costs, or the ones that generate maximum value building was then turned into a
from a given amount of resources. hostel which provides double
rooms, family rooms and disabled
rooms. The above case is related to
the question(s) in
Economics.
A. “how to produce”
B. “for whom to produce”
C. “what to produce” and “how
to produce”
D. “what to produce” and “for
whom to produce”

O
 [HKDSE/2014/Paper 1/4]
T
Figure 2.2  A school needs to decide on the resources to use for teaching.
IS
Example Skills Check
data
interpreting

A fast food restaurant can choose between employing more cashiers

or introducing self-ordering machines to serve more customers.
R

C For whom to produce?

A

The problem of ‘for whom to produce’ refers to the choice about how
to distribute goods to people in society. Under scarcity, not everyone’s
wants can be satisfied. While some people can get the goods they want,
some people cannot. A society needs to set some criteria to decide who Figure 2.3  The emergency medical
can get the goods and in what quantity. Examples of such criteria services are distributed to people
include age and public examination results. according to their needs.

Exercise 2.1
Determine the basic economic problem(s) each of the following is related to.
a. In order to meet the manpower needs in the elderly service sector, more workers from
abroad are employed.

b. A bus company will provide free bus services for the elderly next month.

c. A café offers more dessert options to its VIP card holders.

45
 Chapter 2

2.2 How Do Different Societies Tackle the

Basic Economic Problems?
Brainstorm 2.2
Hong Kong is a market I think the government
economy. The government should build more
should not intervene in public housing units
the housing market and on Lantau Island.
try to influence property
prices!

I think the government should

put more resources into helping
young people find a place to live.

1 Which of the above views do you agree with?

O
2 Is there a ‘best’ way to tackle the housing problem in Hong Kong?

Every society has to face the three basic economic problems. However,
T
different societies tackle the problems in different ways. The problems
can be tackled by:
IS
customs and traditions;
government decisions; and
the market mechanism.
R

2.2.1  By Customs and Traditions

A

In a traditional economy, the three basic economic problems are often

tackled by customs and traditions.

A What to produce?
In a traditional economy, people decide what to produce based on
customs and traditions. They usually produce things similar to what their
ancestors produced. For example, if their ancestors grew tea, they would
probably grow tea as well.

B How to produce?
Similarly, in a traditional economy, people decide how to produce based
on customs and traditions. They follow the ways of their ancestors.
For example, people may grow tea on terraces because this is how their
ancestors did it. As a result, the methods of production in this kind of
society tend to be primitive.
46 market mechanism  市場機制    traditional economy  傳統經濟
 The Three Basic Economic Problems and Private Property Rights

Figure 2.4  In a traditional economy, people usually produce similar products and use
similar methods of production to their ancestors.

C For whom to produce?

In a traditional economy, people follow their customs and traditions to
allocate goods and assets. For example, in some parts of rural China, the
eldest son traditionally inherits most of his father’s wealth, while the

O
daughters may get nothing.

2.2.2  By Government Decisions

T
In a command economy, sometimes called a planned economy, the
IS
state owns most of the resources. It plays a central role in deciding how
the resources are allocated and how the goods are distributed. It plans for
its people and commands its people to follow.
R

A What to produce?
A

In a command economy, the government decides what to produce and

what quantity to produce. For example, the government will allocate a
huge amount of resources to producing guns and missiles if it thinks that
national defence is important.

B How to produce?
Production units follow the government’s instructions regarding the
methods of production. For example, if the government commands firms
to employ only local workers in all production processes, the firms will
not employ any foreign workers.

C For whom to produce?

In a command economy, the government decides how to distribute output
to its people. It sets the criteria for allocation. For example, the government
may allocate goods to its people according to their rank in society.

command economy  指令經濟    planned economy  計劃經濟

47
 Chapter 2
2.2.3  By the Market Mechanism
In a market economy, most resources are privately owned. Allocation
of resources and distribution of goods are guided by market prices,
i.e. by the market mechanism or price mechanism. Market prices are
determined by interactions between buyers and sellers in the market.

A What to produce?
When the price of a good increases, new producers will be attracted to
the market and/or the existing producers will produce more. Price serves
as a signal to inform producers of what to produce. For example, when
prices of residential flats go up, property developers will build more
residential flats to maximise their gains.

B How to produce?

O
Prices of factors of production determine which production methods to
use. Usually, producers use the production methods that minimise costs.
For example, when wages of cashiers go up, shops may install more self-
T
service checkout facilities to replace cashiers as a cost-saving measure.
IS
C For whom to produce?
Prices also determine who gets the goods in a market economy. Those
who are willing and able to pay the market price will get the goods. For
R

example, when the price of a mobile phone is $3,000, those who are
willing and able to pay the price can get the phone.
A

Figure 2.5  In Hong Kong, most goods are allocated to those who are willing and able to pay the
market price.

48 market economy  市場經濟    price mechanism  價格機制

 The Three Basic Economic Problems and Private Property Rights

The table below summarises the major differences between a command

economy and a market economy.

Command economy Market economy

Who owns the most resources are most resources are owned
resources? owned by the state by private individuals

How are resources mostly guided by mostly guided by

and goods allocated? government planning market prices

Who make economic mostly made by mostly made by

decisions? the government private individuals

Table 2.1  Major differences between a command economy and a market economy

2.2.4  In Reality: Mixed Economy

In reality, it is difficult to find a society in which resources are allocated
purely by customs and traditions, government decisions or the market
mechanism. In fact, most societies are mixed economies. They apply

O
More examples of different
the three methods mentioned to different degrees to tackle the basic ways of tackling the basic
economic problems. economic problems in Hong
Kong:
Examples
T • By customs and traditions:
in some traditional villages
in the New Territories, only
IS
In Hong Kong, males are allowed to inherit
property.
indigenous residents in the New Territories follow customs • By government decisions:
the rental rates of public
and traditions in such a way that only males have the right housing are decided by the
R

to build ancestral houses on ancestral land; HKSAR Government.

the postage rates for local mail are decided by the HKSAR • By the market mechanism:
Government; and the prices of vegetables are
A

determined by the market

the prices of shares traded in the stock market are determined mechanism.
by the market mechanism.

Exercise 2.2
How do different societies tackle the three basic economic problems? Complete the table below.

Society Tackles basic economic problems by …

Traditional economy

Command economy

Market economy

mixed economy  混合經濟

49
 Revision Corner  2.1
Guided practice
 ome firms are moving their plants in China to other Southeast Asian countries and, at the same time, adopting
S
higher levels of mechanisation to boost profits. This is an example of using to
solve the problem of .

A. government command … ‘what to produce’

B. government command … ‘how to produce’
C. the market mechanism … ‘what to produce’
D. the market mechanism … ‘how to produce’

Approaching the question

(*Choose the correct option.)

 Consider how the resources are allocated in this case.

 Consider which basic economic problem the relocation of plants and the higher levels of
mechanisation are related to.

O
 Analyse which option is correct.
• The decisions of moving their plants in China to other Southeast Asian countries
and adopting higher levels of mechanisation are guided by market price, i.e. by
T
.
IS
• Moving their plants in China to other Southeast Asian countries and adopting higher levels
of mechanisation is about *(the methods of production/the kinds of goods to produce/who
can get the goods), so it is related to the ‘ ’ problem.
R

Learning Focus
A

HKDSE
Topic/Key point
Paper 1 Paper 2

The meanings of the three basic economic problems and examples 2019 Q2
of the problems 2018 Q2
2014 Q4
2013 Q1

Ways of tackling the three basic economic problems by different 2018 Q1

societies 2017 Q1
2015 Q3

50
Around Us
2.1
Preserving and revitalising the Central Market
The Central Market is a grade 3 historic building
which was completed in 1939. In the 2009-10 Policy
Address, the government proposed the Central
Market Revitalisation Project as part of an initiative
called ‘Conserving Central’. However, the project was
postponed by lawsuits over the structure and height
of the building.

In March 2017, the government granted the site to the Urban Renewal
Authority (URA) for its revitalisation and future operation. In order to
preserve the historic building which is worn down, the URA has adopted
a new construction material to renovate the building.

O
The project is expected to complete by 2022. After the revitalisation,
there will be affordable cultural and retail outlets and an open space,
but there will not be any shops of luxury brands. It will provide an ‘urban
T
oasis’ for locals and tourists.
IS
The Central Market Revitalisation Project can be used to illustrate the
three basic economic problems:
R

1. What to produce?
There will be affordable cultural and retail outlets and an open
A

space instead of shops of luxury brands after the revitalisation.

2. How to produce?
The URA has chosen a new construction material to renovate the
building in order to strengthen its structure.

3. For whom to produce?

The target users of the place after the revitalisation include locals
and tourists.

51
 Chapter 2

2.3 Relationship between Specialisation,

Exchange and Private Property Rights
Brainstorm 2.3
1 Do you think one can produce all the goods he/she needs?
2 Can you use a good produced by someone without his/her permission? Why?

In reality, the market mechanism (or price mechanism) is a common

way to tackle the three basic economic problems. In this section, we
will study three important concepts related to the market mechanism:
specialisation, exchange and private property rights.

2.3.1 Specialisation
Specialisation occurs when workers specialise in producing a good
or a stage of production of a good. Given the same amount of scarce
O
T
resources, when people specialise in producing the goods or services in
which they have an advantage, the total output of the economy will be
IS
higher than that without specialisation. More goods can be produced.

2.3.2 Exchange
R

With specialisation, people do not produce everything they consume.

They can exchange the goods they produce for the goods they want in
A

the market. With exchange, people can consume more goods. Thus, they
enjoy a higher standard of living. Exchange makes specialisation possible.

I don’t want any

No one is willing to
sheep. I won’t
exchange oranges for my
exchange my
sheep. Now I not only
oranges for your
have to raise sheep but
sheep!
also grow oranges
by myself …

Figure 2.6  Without exchange, it is impossible for specialisation to take place.

52 specialisation  專門化    exchange  交換

 The Three Basic Economic Problems and Private Property Rights

2.3.3  Private Property Rights

Exchange is a condition for specialisation, while private property rights
are the foundation for exchange to take place in a market economy.

A Meaning of private property rights

A person has private property rights over a good if he or she possesses
the following three rights: exclusive right to use, exclusive right to
receive income and right to transfer.

a Exclusive right to use

In the past
The owner has the right to exclude others from using his or her
property. No one is allowed to use the owner’s property without Marlene had bought a cookery
his or her permission. In addition, the owner has the right to use book from a bookstore. Her
the property in any way he or she wishes as long as it is lawful. friend, Kitman, said to her, “You
have private property rights to

O
this cookery book.” Which of the
Example following rights would Marlene
have after the purchase of the
Your classmates are not allowed to use your schoolbag book?
T
without your permission. Besides, you can use your (1) To follow the recipes in the
schoolbag to carry anything, including sports shoes and book in preparing a dinner for
IS
Kitman
books. (2) To scan and upload the whole
book to her blog
(3) To leave the book on the
b Exclusive right to receive income bookshelf without reading it
R

The owner has the exclusive right to receive income generated (4) To lend the book to Kitman
and ask for a dinner in return
from his or her property. No one can generate income from the
property without the owner’s permission. A. (1), (2) and (3) only
A

B. (1), (2) and (4) only

C. (1), (3) and (4) only
Example D. (2), (3) and (4) only
 [HKDSE/2016/Paper 1/5]
The owner of an apartment can rent out his/her property
and receive rental income.

c Right to transfer
The owner has the right to transfer his or her property to other
people. The transfer may not necessarily involve compensation.

Example

You can give your schoolbag to your classmate for free or sell
it to a second-hand shop for money.

private property rights  私有產權    exclusive right to use  獨有使用權    exclusive right to receive income  收入專屬權
right to transfer  轉讓權
53
 Chapter 2
B Importance of private property rights
in a market economy
When regulations defining and protecting private property rights cannot
be enforced, there is no guarantee that the buyer of a good can use it
or generate income from it exclusively. As a result, there is no reason
for people to pay for the good. Exchange will not take place and price
mechanism cannot function. Therefore, well-defined and well-protected
private property rights are a prerequisite for the functioning of price
mechanism.

In a market economy, basic economic problems are tackled with the help
of price mechanism. People compete for economic goods by means of
price competition. Those who are willing and able to pay the market
price can obtain the goods. Prices become a signal guiding the allocation
of economic goods. The price mechanism allocates the economic
goods to the highest-valued users.

O
I will sell my house to the one 10 million!
who offers the highest price! 8 million!
T
IS

7 million!
R

Figure 2.7  With well-defined and well-protected private property rights, economic
goods are allocated to the highest-valued users.
A

However, market price cannot guide resource allocation effectively if

private property rights are not well defined and well protected, and
society will not allocate scarce resources according to price signals. People
will then use non-price methods such as customs and traditions,
instead of price mechanism, to allocate resources. As a result, resources
may not be allocated to the highest-valued users.

Exercise 2.3
Explain whether each of the following people has a full set of private property rights over the
housing unit concerned.
a. the tenant of a public housing unit rented from the Housing Authority

b. the tenant of a private housing unit

c. the owner of a private housing unit

54
Revision Corner  2.2
Learning Focus
HKDSE
Topic/Key point
Paper 1 Paper 2

Exchange is a condition for specialisation

The meaning of private property rights and its importance in a 2019 Q1 2013 Q2a (4)
market economy 2016 Q5

Around Us
2.2
Private property rights and endangered species
Some wild animals are under threat of extinction
because some of their body parts are of great
commercial value. For example, some wild elephants are

O
killed for their ivory tusks; some species of crocodiles
are killed for their skins and many sharks are killed for
their fins. However, cows, pigs and chickens are not
T
under the same threat, even though their meat is also
of great commercial value and a lot of them are killed
IS
every day. Why is there such a difference?

In terms of private property rights, wild animals such as

R

wild elephants and sharks are not private properties

of anyone. No one has the exclusive right to use them,
receive income from them or transfer them. This results
A

in excessive killing, which causes the number of some

endangered species to fall continuously.

On the contrary, cows, pigs and chickens are mostly

raised on private farms. Farm owners have the exclusive
right to use them, receive income from them and transfer
them to anyone they like. The owners have strong
incentives to protect and breed them. In addition, price
serves as a signal to help owners decide how many of
these animals they are to keep. The number of these
animals is therefore unlikely to fall drastically.

Therefore, privatising endangered species might save

them from being hunted to extinction.

55
 Chapter 2

CONCEPT MAP
The three basic economic problems

What to produce How to produce For whom to produce

Ways to tackle

By a combination of
By customs By government By the market customs and traditions,
and traditions decisions mechanism government decisions and
(Traditional (Command or (Market the market mechanism
economy) planned economy) economy) (Mixed economy)

Exclusive right to use

O
Private property rights

Exclusive right to receive income

Exchange
T Right to transfer
Specialisation
IS

CHECKLIST
R

I am now able to …
  state the three basic economic problems;
A

 explain how different types of societies tackle the basic economic problems;
  understand exchange as a condition for specialisation;
  define private property rights;
 explain the importance of private property rights in a market economy.
(Put a tick (ü) against the information that applies.)

GLOSSARY
basic economic problem  基本經濟問題 mixed economy  混合經濟 A

command economy  指令經濟 planned economy  計劃經濟

exchange  交換 price mechanism  價格機制 e-Word Bank

exclusive right to receive income  收入專屬權 private property rights  私有產權

exclusive right to use  獨有使用權 right to transfer  轉讓權
market economy  市場經濟 specialisation  專門化
market mechanism  市場機制 traditional economy  傳統經濟

56
 The Three Basic Economic Problems and Private Property Rights

CHAPTER SUMMARY
Familiarising yourself with items in green is important for effective revision.
Paying attention to items in the boxes is helpful for understanding the concept(s).

Make your

2.1 The Three Basic Economic Problems

own notes

Basic economic problem Meaning

Making choices about the kinds and

What to produce?
quantities of goods to produce

Making choices about the methods

How to produce?
of production

Making choices about how to

For whom to produce?
distribute goods to people in society

2.2 How Do Different Societies Tackle the

Basic Economic Problems?
O
T
The three basic economic problems can be tackled by:
 customs and traditions
IS
 government decisions
 the market mechanism
Most societies are mixed economies in reality.
R

By customs and traditions

A

In a traditional economy, the three basic economic problems are often
tackled by customs and traditions.

By government decisions
In a command/planned economy:
The problem of scarcity still exists in a
 Most resources are owned by the state. command/planned economy.
 Allocation of resources is mostly guided by government planning.
 Economic decisions are mostly made by the government.

By the market mechanism

In a market economy:
In a market economy, not all resources
 Most resources are owned by private individuals. are privately owned and allocated by the
market mechanism.
 Allocation of resources is mostly guided by market prices.
 Economic decisions are mostly made by private individuals.

57
 Chapter 2
2.3 Relationship between Specialisation,
Exchange and Private Property Rights
Specialisation
Specialisation occurs when workers specialise in producing a good or a

stage of production of a good.
Total output of an economy will be higher than that without
specialisation.

Exchange
People can exchange the goods they produce for the goods they want in
the market.
People can consume more goods.

People enjoy a higher standard of living.

Exchange is a condition for specialisation.

O
Private property rights
Private property rights are the foundation for exchange to take place in a
Private property rights not only exist in a
market economy.
T market economy but also in traditional
Meaning of private property rights economies and command economies.

 A person has private property rights over a good if he or she

IS
possesses the exclusive right to use, exclusive right to receive
income and right to transfer.

Right Meaning
R

A person who has the exclusive right to

use a good may not have the exclusive
Exclusive right to use The owner has the right to right to receive income from it and/or
exclude others from using his the right to transfer it.
A

or her property.

Exclusive right to receive The owner has the exclusive

income right to receive income
generated from his or her
property.

Right to transfer The owner has the right to

transfer his or her property to
other people.

Importance of private property rights in a market economy

 Well-defined and well-protected private property rights are the
prerequisite for the functioning of price mechanism.
 The price mechanism allocates the economic goods to the highest-
valued users.
 If private property rights are not well defined and well protected,
people will then use non-price methods to allocate resources.

58
REVISION EXERCISEThe Three Basic Economic Problems and Private Property Rights
Multiple Choice Questions
Choose the best answer. 4.
As announced by the Chief Executive in the
2017 Policy Address, the ‘Starter Homes’ Pilot
1. Which of the following are about the ‘what to Scheme would soon be introduced. The aim
produce’ problem? was to offer, in addition to private housing
units, a specified number of affordable flats for
(1) the colour of handbags that a factory produces sale to the ‘first-time buyers’ who have never
(2) the quantity of handbags that a factory owned any property in Hong Kong and meet
produces other prescribed eligibility criteria.
(3) the number of workers that a factory employs
to produce handbags
The above case is related to the
A. (1) and (2) only
question(s) in economics.
B. (1) and (3) only
C. (2) and (3) only A. ‘what to produce’
D. (1), (2) and (3) B. ‘what to produce’ and ‘how to produce’
C. ‘what to produce’ and ‘for whom to produce’
D. ‘how to produce’ and ‘for whom to produce’
2. Which of the following is related to the ‘how to
produce’ problem?
5. The government proposed to purchase places

O
A. A factory decides to adopt a new production
from private residential care homes to ease the
system to save energy.
shortage of subsidised residential care places for
B. A manufacturer decides to develop a new
the elderly. The service hours of new elderly day
series of mobile computing devices.
care centres would also be extended to enhance

T
C. A magazine publisher decides to provide a
the elderly community care services.
digital version of its magazine on the Internet.
D. The government decides to adjust the ratio The above proposal is related to the
IS
of public rental housing flats to Home question(s) in economics.
Ownership Scheme (HOS) flats. A. ‘what to produce’
B. ‘what to produce’ and ‘how to produce’
C. ‘what to produce’ and ‘for whom to produce’
3. Which of the following are related to the ‘for
R

D. ‘how to produce’ and ‘for whom to produce’

whom to produce’ problem?
(1) A clinic serves patients on a first-come-first-
serve basis. 6. After the US government announced that it
A

(2) A public hospital employs more nurses to would impose a tariff on steel, Harley-Davidson,
provide better services. a producer of motorcycles, decided to move some
(3) A canteen in a private hospital provides of its production chains away from the US. The
special meals for certain patients. spokesman explained that the company expected
the cost of steel in the US to increase sharply after
A. (1) and (2) only
the tariff was imposed. The move could reduce
B. (1) and (3) only
costs.
C. (2) and (3) only
D. (1), (2) and (3) This is an example of using to solve
the problem of .
A. government command … ‘how to produce’
B. government command … ‘for whom to
produce’
C. the market mechanism … ‘how to produce’
D. the market mechanism … ‘for whom to
produce’

59
 REVISION
Chapter 2 EXERCISE

7. Which of the following statements about a 12. In Hong Kong, the distribution of which of the
planned economy is CORRECT? following resources or goods are mainly guided
by price signals?
A. Scarcity does not exist.
B. There is no problem of unemployment. (1) second-hand Home Ownership Scheme flats
C. Everyone receives the same amount of (2) petrol and diesel
resources. (3) tap water
D. T h e g o v e r n m e n t m a k e s m o s t o f t h e
A. (1) and (2) only
production decisions.
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
8. Which of the following is a characteristic of a
planned economy?
A. There are no private property rights in the 13. The following table shows the characteristics of
economy. two countries:
B. Income distribution is relatively even in the
economy. Country A Country B
C. The problem of scarcity does not exist in the
economy. Ownership most resources all resources
D. Most resources of the economy are owned by of resources are owned are owned by

O
the state. by private the country
individuals

Distribution guided by guided by

9. In a market economy,
T .
of goods market prices government
A. there is only price competition command
B. all resources are privately owned
IS
C. all goods are economic goods
D. most resources are allocated by the price Which of the following statements about the two
mechanism countries is CORRECT?
A. Country A relies more on price competition to
R

allocate resources than Country B.

10. Which of the following about a planned economy B. The general price level of Country A is higher
and a market economy must be CORRECT? than that of Country B.
A. Compared to a planned economy, a market C. People living in Country A are richer than
A

economy has a higher inflation rate. those living in country B.

B. Compared to a planned economy, more D. Scarcity exists in Country A but not in
resources are privately owned in a market Country B.
economy.
C. The income gap between the rich and the
poor in a market economy is larger than that 14. Sandy is a die-hard fan of a Korean singer. She
in a planned economy. has bought all the singer’s music albums. Which
D. The unemployment rate in a market economy of the following rights does Sandy have over the
is higher than that in a planned economy. music albums?
(1) to play the music albums at home
(2) to sell the music albums at a higher price to
11. In Country X, the allocation of most resources another fan
and goods is guided by price signals. At the (3) to exchange the music albums for another
same time, the government controls the prices of singer’s music albums with her friend
some crucial resources at certain levels. We can (4) to copy the audio tracks of the music albums
conclude that Country X is a and upload them to a social networking site
A. traditional economy. A. (1) and (4) only
B. planned economy. B. (2) and (3) only
C. market economy. C. (1), (2) and (3) only
D. mixed economy. D. (2), (3) and (4) only

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 The Three Basic Economic Problems and Private Property Rights

15. In a café, a computer is provided for customers to 17. A well-defined and well-protected private
use. Customers who pay $50 can use the computer property rights system is important to a market
to get online for an hour. Joan pays $100 for using economy because
this Internet service. She most likely possesses
A. the wealthy people have to be protected
A. the exclusive right to sell the computer to properly.
others. B. most of the resources in a market economy
B. the exclusive right to use the computer for 2 are owned by private individuals.
hours. C. the price mechanism is the only way to
C. the exclusive right to bring the computer allocate resources in a market economy.
home. D. exchanges cannot occur if private property
D. the exclusive right to lease out the computer rights over goods are not well-defined.
and earn an income.

16. I n a market economy, the market mechanism

cannot function properly if
(1) there is non-price competition.
(2) private property rights are not well defined.
(3) the regulations protecting private property

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rights cannot be enforced.
A. (1) only
B. (1) and (2) only
C. (1) and (3) only
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D. (2) and (3) only
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Short Questions With DRQ elements

1. Miss Ho plans to sell clothes or skincare products on the Internet. She finally decides to sell
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clothes only and her target customers are young ladies.

(a) Identify the basic economic problem(s) that Miss Ho faces when making the above
decisions. (2 marks)
A

(b) As the sale of clothes is not satisfactory, Miss Ho offers discounts to customers. Does
Miss Ho’s online shop operate in a traditional economy, a command economy or a
market economy? Explain. (2 marks)

2. Suppose economy A transforms from a planned economy to a market economy.

(a) State TWO differences between a planned economy and a market economy. (4 marks)
(b) Some people suggest that after the transformation to a market economy, the
distribution of income in economy A will become more uneven. Do you agree? Give
ONE reason to support your answer. (3 marks)

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 REVISION
Chapter 2 EXERCISE

3. Refer to the following conversation.

Antonio: According to the rules set by my ancestors, I am

the one who inherits all my father’s fortune …
Martin: You can sell the ancestral house and earn lots of
money!
Antonio: No ... according to the rules set by my ancestors,
I cannot sell the ancestral house. I can either
live in it or rent it out at the market price.

(a) Suppose the market rent for Antonio’s ancestral house increases. Will this affect
Antonio’s opportunity cost of living in the ancestral house? Explain. (3 marks)
(b) What are private property rights? Does Antonio have a full set of private property
rights over the ancestral house? Explain. (4 marks)

4. To help young people purchase their first homes, a government sells subsidised residential
flats to eligible people at prices lower than the market price. However, the flats under this

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scheme have to be self-occupied.
How are the private property rights over the flats under the scheme weakened? Explain.
 (2 marks)
T
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Long Question
The owner of a school’s tuck shop is considering expanding his business. With his limited
capital in hand, he can choose either to provide a school bus service for the school or start a
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tuck shop in another school.

However, as he is new to the school bus service market, he needs to learn how to run a school
A

bus service. For example, he needs to decide on the routes to run, the number of buses to buy,
the number of drivers to employ, the salary of drivers, the bus fare and so on.
(a) What is the tuck shop owner’s opportunity cost of choosing to provide a school bus
service? (2 marks)
(b) If the tuck shop owner chose to provide a school bus service and later found that the
number of students using the service dropped drastically, would the opportunity cost of
choosing to provide a school bus service change? Explain. (3 marks)
(c) What type(s) of basic economic questions does the tuck shop owner need to tackle when
providing the school bus service? Use ONE example of each to explain. (6 marks)
(d) Do you think the tuck shop owner has a full set of private property rights over the tuck
shop premises of the school he rents? Explain. (2 marks)

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DRQ Level-up The Three Basic Economic Problems and Private Property Rights

Read the information and answer the questions that follow.

Every year, the Food and Environmental Hygiene Department (FEHD) organises the Lunar New
Year Fairs at various places in Hong Kong, for example Victoria Park, Fa Hui Park and Yuen Wo
Playground. The stalls at the fairs are usually put up for auction a few months earlier.

Source A: A news report about the auction for the 2018 Victoria Park Lunar New Year Fair stalls

The open auction for stalls at the 2018 Victoria Park Lunar New Year Fair next year concluded Topic
yesterday (8 November). A total of 473 stalls were let out, including 282 dry goods stalls, 180 wet Explorer
goods stalls, 8 thematic stalls and 3 fast food stalls. Two dry goods stalls were withdrawn as there
Besides stalls at the
were no bids. They will be let out on a first-come-first-served basis later. Lunar New Year Fairs,
the government also
Stalls Minimum bid price ($) Maximum bid price ($) Average bid price ($) holds public auction
for sale of confiscated/
Dry goods stalls 13,920 76,200 25,988 unclaimed goods
sometimes. Scan the
Wet goods stalls 10,650 87,500 23,718 QR code for more
information.
Thematic stalls 45,500 49,500 47,050

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Fast food stalls 196,460 500,000 297,640

(Source: various newspapers)

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Source B: Conversation between two successful bidders
Data
Reading
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When studying
Hey! I’ve bid on a stall at the Victoria Park Lunar New Year economics, you may
Fair. I am thinking of subletting (分租) it to other people. come across information
presented in the form
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As far as I remember, you can’t sublet or transfer the of a dialogue, online

stall to other people. conversation, etc. When
Amy reading, pay attention
to the context and
A

Sam
Questions information about the
speakers, if given.
(a) (i)  With reference to Source A, explain which basic economic problem(s) is/are being
tackled.  (2 marks)
R elevant concepts
(ii) How is/are the problem(s) tackled?  (4 marks) (a) the three basic
economic problems
(b) With reference to Source B, explain if Amy has a full set of private property rights over her (b) private property rights
stall.  (2 marks) (c) opportunity cost

(c) (i) With reference to Sources A and B, what is the opportunity cost for Amy to run a stall
at the Lunar New Year Fair?  (2 marks)
(ii) Suppose it rained most of the time during the Lunar New Year Fair and not many
people visited the Fair. Would this affect Amy’s opportunity cost of running a stall at
the Fair? Explain.
 (3 marks)
(iii) Suppose Amy could sublet the stall to other people. Would this affect her opportunity
cost of running a stall at the Fair? Explain. (3 marks)

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 Suggested answers — Chapter 2

Short Questions
1 (a) Miss Ho has to decide what kinds of products to sell (clothes or skincare products), and
this is related to the ‘what to produce’ problem. (1)
Miss Ho also has to decide who the target customers are (young ladies), and this is related
to the ‘for whom to produce’ problem. (1)
(b) The shop operates in a market economy because Miss Ho adjusts the prices according to
the market demand. (2)

2 (a) - Most resources are owned by the state in a planned economy while most resources
are owned by private individuals in a market economy.
- Allocation of resources and goods are mostly guided by government planning in
a planned economy while allocation of resources and goods are mostly guided by
market prices in a market economy.
- Economic decisions are mostly made by the government in a planned economy while
economic decisions are mostly made by private individuals in a market economy.
- Any reasonable answers
(Mark the FIRST TWO points only, 2 marks each)
(b) No. The key differences between a planned economy and a market economy are the
ownership of resources and allocation of resources. This has nothing to do with the
distribution of income. (3)
OR
Any reasonable answer

3 (a) Yes. (1)

Antonio’s opportunity cost of living in the ancestral house is the rent that he can
receive from renting out the house. When the market rent for the house increases, his
opportunity cost of living in the house will increase. (2)

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(b) Private property rights refer to the exclusive right to use, the exclusive right to receive
income from and the right to transfer a property owned by an individual. Antonio does
not have a full set of private property rights over the ancestral house because he does
not have the right to transfer, as he cannot sell the ancestral house. (4)
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4 The private property rights over the flats under the scheme are weakened because the
owners’ right to receive income from their flats is confined. (2)
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Long Question
(a) The opportunity cost of providing a school bus service to the owner is the option of starting
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a tuck shop in another school. (2)

(b) No. (1)
The value of the highest-valued option forgone (i.e. starting a tuck shop in another school)
would not change. (2)
(c) ‘What to produce’: e.g. the owner has to decide the routes to run. (2)
A

‘How to produce’: e.g. the owner has to decide the number of drivers to employ. (2)
‘For whom to produce’: e.g. the owner has to decide to whom he provides the school bus
service, such as primary or secondary students. (2)
OR any reasonable answers
(1 mark for the problem, 1 mark for the example)
(d) No. He has the exclusive right to use the tuck shop premises to sell snacks. However, he
does not have the exclusive right to receive income from the premises as he cannot rent the
premises out to generate income. He also does not have the right to transfer the tuck shop
premises, as he cannot sell the premises. (2)

DRQ Level-up
(a) (i) For whom to produce. (1) The question of who can get the right to operate the stalls is
considered. (1)
(ii) The problem is tackled by the market mechanism. (1) The stalls were allocated by market
prices/price mechanism. (1)
The problem is also tackled by government decisions. (1) The stalls which received no bids
were let out on a first-come-first-served basis, a criterion that is set by the government. (1)
(b) No. Amy does not have the right to transfer the stall. Her right to receive income from the
stall is confined either as she cannot sublet the stall to other people. (2)
(c) (i) The opportunity cost of running a stall at the Lunar New Year Fair includes the monetary
cost of bidding the stall (1) and the highest-valued alternative use of the time spent
running the stall. (1)
(ii) No. (1)
It would only affect the value of running a stall but not the opportunity cost. (2)
(iii) Yes. (1)
The opportunity cost would increase if she ran the stall herself, as she would have to
forgo the income from subletting the stall. (2)