Shell counts cost of damage on Niger Delta
(a) Define the following terms:
i. multinational company [2 marks]
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
1 A vague response that it is a large company 1
A response that identifies MNCs as corporations that own or control
2 2
production facilities in a different country from where they are based
ii. external costs [2 marks]
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
1 A vague response that it includes costs such as pollution 1
A cost imposed on a third party, in this case the Nigerian farmers, who are
2 not connected to the activity creating the cost, in this case Shell's drilling of 2
oil in the nation
(b) i. Calculate the average level of: [3 marks]
• Inward foreign investment - 1.65
• Oil price - $70.60
• GDP growth – 2.38%
ii. Using the information from (bi.) explain the impact of both FDI and oil prices on the
economy of the African nation. [2 marks]
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
A response that includes a recognition of either the relationship between
1 FDI and economic growth OR the relationship between oil prices and 1
economic growth in the nation
A response that includes a recognition of either the relationship between
2 FDI and economic growth AND the relationship between oil prices and 2
economic growth in the nation
(c) Illustrate using an appropriate diagram how the damage to the Niger Delta is a form
of market failure? [4 marks]
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
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InThinking www.thinkib.net/Economics 1
For drawing a diagram which illustrates a demerit good (oil extraction)
produced at an equilibrium output above the socially optimum level of Q2.
OR a response which recognises oil extraction as a demerit good, meaning
a good or service whose consumption is considered unhealthy or degrading
1 1-2
and would be over-consumed if production was left to market forces, as in
Nigeria. Neither the producer or consumer pays the full external cost of
production so, as a consequence, oil is over supplied and therefore over
consumed.
For drawing a diagram which illustrates a demerit good (oil extraction)
produced at an equilibrium output above the socially optimum level of Q2.
AND a response which recognises oil extraction as a demerit good,
meaning a good or service whose consumption is considered unhealthy or
2 3-4
degrading and would be over-consumed if production was left to market
forces, as in Nigeria. Neither the producer or consumer pays the full
external cost of production so, as a consequence, oil is over supplied and
therefore over consumed.
(d) Explain possible reasons why Nigerian farmers sought compensation from the
Hague rather than seeking compensation in Nigeria? [4 marks]
Reasons include:
• The power and influence that Shell might have possessed in Nigeria would have made
it more difficult for farmers to bring about a court case without substantial funds and
connections.
• The sums likely to be awarded in Holland were likely to be significantly higher than
those awarded by a Nigerian court.
• The rule of law regarding compensation for financial losses may not be established in
Nigeria.
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
1 For a response that includes 1 or two of the above 1-2
For a response that includes 3 of the above reasons – other reasons might be
2 3-4
appropriate
(e) Explain using a diagram how the Nigerian government could reduce the impact
caused by negative externalities arising from the production of oil. [4 marks]
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
For a diagram showing a tax, equal to the size of the externality, raising the
cost of production and a new equilibrium level of production at the socially
1 1-2
optimum level of output at OR an explanation that the tax should reduce
output to the socially optimum level. A proportion of the tax revenue
© Mark Johnson,
InThinking www.thinkib.net/Economics 2
collected could be used to improve living standards in the area for those
impacted by the rare earth production.
For a diagram showing a tax, equal to the size of the externality, raising the
cost of production and a new equilibrium level of production at the socially
optimum level of output AND an explanation that the tax should reduce
2 3-4
output to the socially optimum level. A proportion of the tax revenue
collected could be used to improve living standards in the area for those
impacted by the rare earth production.
Incorrectly labelled diagrams can be rewarded with a maximum of 1. Suitable labels include:
P and Q, Price and Quantity or other similar labels.
(f) Using a production possibilities curve (PPC) diagram, explain how the actions of ‘oil
thieves and illegal refiners’, impacts on the economy of Nigeria (paragraph 9). [4 marks]
Level Descriptor Mark
0 The work does not reach any of the standard described below 0
For a correctly drawn PPF diagram showing two PPF curves. One
showing the current situation in the economy and one representing a PPF
curve to the right of the original. The second PPF curve represents the
level of potential in the economy. Alternatively, candidates may express
the above with two LRAS curves, one further to the right than the other.
1 1-2
OR 2 marks for an explanation of the diagram(s) with an explanation that
Nigeria’s insecurity, caused by the actions of ‘oil thieves and illegal
refiners, has actively prevented investment into the country. It is highly
likely that given its vast oil reserves, Nigeria would normally be able to
attract investors, if the security situation were resolved.
For a correctly drawn PPF diagram showing two PPF curves. One
showing the current situation in the economy and one representing a PPF
curve to the right of the original. The second PPF curve represents the
level of potential in the economy. Alternatively, candidates may express
the above with two LRAS curves, one further to the right than the other.
2 3-4
AND 2 marks for an explanation of the diagram(s) with an explanation that
Nigeria’s insecurity, caused by the actions of ‘oil thieves and illegal
refiners, has actively prevented investment into the country. It is highly
likely that given its vast oil reserves, Nigeria would normally be able to
attract investors, if the security situation were resolved.
The PPF diagram should be labelled either consumer goods and industrial goods, or goods
and services - other labels maybe appropriate.
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InThinking www.thinkib.net/Economics 3
(g) Using the passage as well as your knowledge of economics evaluate the view that
MNCs can improve economic growth and development to an LEDC? [15 marks]
Responses should recognise both the advantages and disadvantages of an LEDC hosting an
LEDC like Shell.
Some of the positive contributions made by MNCs include:
• the generation of much needed foreign capital and export revenues as most MNCs
have relatively low levels of capital and find it difficult to raise funds cheaply on the
international financial markets
• contribution to tax revenues
• employment opportunities
• a rise in the country’s skills base through improved education and training
• many MNCs generally pay relatively higher wages and offer better working
conditions than domestic firms.
However, some of the negative externalities resulting from the actions of MNCs include:
• the profits are generally repatriated back to the host nation
• that many MNCs are granted tax concessions, as part of the deal to relocate
• a large number of the well paid jobs created are taken by expatriate labour. Many of
the jobs filled by local residents are low skilled and low paid
• many LEDCs attract investment by offering MNCs weak environmental regulations
as well as the suppression of trade unions and workers rights.
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Responses to section (g) should be graded according to the following grade bands:
There is no clear answer to the question but some limited: 1-3
• Use of economic terms
• Application of economic theory
• Evaluation
• Use of information from the case example to support the answer
There is a vague answer to the question with limited: 4-6
• Use of economic terms
• Application of economic theory
• Evaluation
• Use of information from the case example to support the answer
There is an answer to the question with satisfactory: 7-9
• Use of economic terms
• Application of economic theory
• Evaluation
• Use of information from the case example to support the answer
There is a clear answer to the question with good: 10-12
• Use of economic terms
• Application of economic theory
• Evaluation
• Use of information from the case example to support the answer
There is a clear answer to the question with excellent: 13-15
• Use of economic terms
• Application of economic theory
• Evaluation
• Use of information from the case example to support the answer
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InThinking www.thinkib.net/Economics 5
