Practice

Free response question

Microeconomics · Hard · 22 marks

EO past paper: 2026 International Final, Microeconomics paper

FRQ Scenario 2. Lake Victoria Sustainability Lake Victoria is Africa's largest freshwater lake with a surface area of approximately 68,800 km². It is shared by the countries of Tanzania, Uganda, and Kenya. It is a significant hub for commercial fishing, especially for the species of Nile perch, a key export good, and tilapia, which is often consumed locally. Overall the annual catch in Lake Victoria has a market value of US$1.1 billion. These commercial fishing activities sustain "millions of families, feeding communities, powering local communities". Unfortunately, the lake is under increasing sustainability threats. Overfishing has led the Nile perch's catch volumes to fall by around 70% in the last two decades. Also, there is increased water pollution and biodiversity loss. Excessive and uncontrolled development along shoreline areas is also contributing to higher pollution levels and further reducing biodiversity in Lake Victoria. Sources (adapted): Daily News Tanzania, Tanzania Moves to Rein in Industrial Fishing on Lake Victoria (January 13, 2026); Lake Victoria Fisheries Organisation, Nile Perch Fisheries Management Plan III (2021-2025).

(a)Describe why Lake Victoria is classified as a common-access (common-pool) resource.[2](b)Using an appropriate diagram, illustrate how overfishing of Nile perch creates a negative production externality. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.)[4](c)Identify one third party negatively affected by overfishing in Lake Victoria and describe how that party is harmed.[2](d)Analyze why the free market fails to allocate Lake Victoria's fishery resources efficiently, providing two reasons.[4](e)Additional information: Tanzania controls about 50% of Lake Victoria. In January 2026, Tanzania's Minister for Livestock and Fisheries Dr. Bashiru Ally, announced that measures need to be taken to protect the lake's ecosystems. Specifically, he noted that a significant part of the overfishing is due to industrial operators. These are large capital-intensive firms using well equipped fishing boats capable of catching large volumes of fish. They are also accused of using illegal fishing practices due to weak monitoring. Under the new policy, industrial fishing operators will no longer be allowed to operate in the areas of Lake Victoria controlled by Tanzania. Instead the fishing will be allowed for small-scale fishermen, who often use small fishing boats and traditional fishing methods. The fish-processing industry will have to source (get) its fish from these small-scale operators. Using an appropriate diagram, illustrate how the proposed policy could reduce environmental degradation and improve the sustainability of Lake Victoria's fishery. Assume the policy effectively reduces total fishing and environmental damage for the purpose of this question. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.)[4](f)Assume you are an economic adviser to Tanzania's Ministry for Livestock and Fisheries. Recommend two conditions that must be met for the proposed policy to achieve its intended objectives and provide a rationale for each recommendation.[4](g)Suggest one additional government policy that could improve the long-run sustainability of Lake Victoria's fishery and justify how it would address the market failure.[2]

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