H1 Economics C2 Block Test

Transcription

1 H1 Economics C2 Block Test Question 2 Healthcare services in Singapore are not free but partially subsidised by the government. Such a policy would help to ensure that healthcare services remain affordable, especially for the lower income group. (a) Explain the reasons why the Singapore government subsidises healthcare services to correct market failure [10] (b) Discuss whether Singapore should adopt a fully subsidised system for healthcare services. [15] Outline Part (a) Introduction Focus: The question focuses on the causes of market failure. The positive consumption externality leads to inefficient allocation of resources in the healthcare market while income inequality leads to unfair distribution of resources (equity issue). Body Inefficiency arises from the presence of Positive Consumption Externalities. Students have to provide elaboration and exemplification of the costs and benefits within the market framework (following the SEE approach). The identification and illustration of the deadweight loss and the social optimal equilibrium using a diagram would provide evidence of inefficiency. For equity issue, students have to explain how income inquality resulted in unfair distribution of resources in the market. Conclusion Sum up reasons are related to case of health care as a merit good 1

2 Part (b): Introduction Focus : Explain the link of fully subsidized to free health care services 100% subsidy = FREE or zero pricing for everyone (inclusive) Is it best for SG to adopt? Body (A) Thesis analysis: Should adopt 1. Efficiency reason Special case when Positive Externalities are very large. A subsidy diagram on healthcare can show that it is possible to achieve AE. 2. Equity reason Universal free health care => inclusive. Poor not excluded from access to health care (consider as basic essential good). The rich can afford better and more expensive private health care. (B)Anti-Thesis analysis: No, shouldn t adopt: could go for partial subsidy or other intervention methods 1. Efficiency grounds: a) Over-consumption if fully subsidized (diagram) - output above socially optimal. b) Poor quality of service e.g. long waiting list c) Higher costs due to lack of market discipline to drive down costs from supplier s side. d) Strain on government budget since subsidy is financed from tax revenue. Negative repercussions on public finance if health care expenditure keeps on rising Extra point: In theory, free or zero pricing is valid for Public Goods. But health care is not a public good by definition. It is both excludable and rivalrous. Conclusion ( Evaluative conclusion/judgment ) Stand: SG should not adopt a fully subsidized health care system. 2

3 Detailed Answers: (a) Explain why there is inefficient allocation of resources in the healthcare market. [10] Introduction Inefficient allocation of resources occur in the healthcare market from two sources: positive consumption externality and imperfect information. Efficient allocation of resources occurs when social welfare is maximized at SMB=SMC. Subsidies are a key measure used by governments to correct inefficiency due to presence of positive externalities. Body Explain market failure in healthcare using the standard externality framework using a diagram. Explain how positive consumption externality leads to market failure. Define, explain + exemplify PMC,PMB and EMB Providers of healthcare services, for example, only consider the private marginal cost (PMC), which is the cost of additional unit of healthcare service to be provided to another consumer such as the wages of the doctor and the costs of the radiography and X-rays. Individuals who seek healthcare service will consider only the private marginal benefit (PMB) which is the benefit of improved health or a cure from illness from the use of the additional healthcare service. Moreover, consuming healthcare also results in positive consumption externalities when the consumption positively affects the well-being of third parties who do not pay any compensation for that effect. The external marginal benefits that come with the person receiving good healthcare service is the increase in productivity of his co-workers, as they will not be infected by infectious illness. With a larger proportion of healthy workforce, the country might be able to attract more MNCs to set up in the country, benefiting many others and raising their incomes. Individuals are not concerned about the external benefits to others but only their own private benefits as the external benefits are unpriced by the price mechanism and not included in the private benefits. As such, the free market has over-priced the consumption of healthcare which will lead to an inefficient allocation of resources and hence market failure. Refer to Fig 1 below, for each additional unit of healthcare service, for example, a vaccination against dengue, the social marginal benefit (SMB) includes the private marginal benefit (PMB) plus the external marginal benefit (EMB) on third parties. Hence the actual benefit borne by the society is represented by the SMB, which takes into account the full benefits to society of an extra unit of vaccine. SMB = PMB + EMB. 3

4 Figure 1: Positive consumption externality Price C PMC=SMC (since EMC=0) P S EMB B ABC = Deadweight Loss P m A SMB = PMB + EMB PMB Q m Q s Quantity of vaccine From Fig 1, the presence of an external benefit causes a divergence between private and social benefits, with SMB above PMB as SMB = PMB + EMB. Assume that vaccine injection yields no negative externality, EMC=0. Thus, PMC=SMC. Under the price mechanism, market equilibrium quantity of vaccine is Q m, where PMB = PMC, as consumers and producers of vaccines only consider their own benefits and costs. However the socially efficient quantity of vaccination should be at Q S where SMB=SMC, where the full costs and benefits and costs to society are considered. Q s is more than the market equilibrium quantity, Q m where PMB = PMC. Thus there is under consumption by the quantity Q S Q m Area Q S Q m CB is the total social benefit forgone due to the underconsumption Q S Q m. Area Q s Q m AB is the total social cost not incurred underconsumption Q s Q m. Since total social benefit foregone exceeds the total social cost costs not incurred for under consumption Q s Q m, area ABC represents the deadweight welfare loss due to under consumption of Q s Q m. Unfair distribution of resources (equity issue) In a market economy, the ability of individuals to consume goods depends on their income and wealth. The market system will not respond to the needs and wants of those with insufficient economic (dollar) votes to have any impact on market demand because what matters in a market based system is effective demand (willingness and ability to pay) for goods and services. Consequently, goods and services do not necessarily flow to those who need them the most e.g. healthcare services for the poor. It favours those with the buying or purchasing power. The free market system thus fails to provide for those without the means to pay for goods and services. Hence if a consumer from the low income group is unable to pay for healthcare services, he/she will not be able to seek healthcare services when sick. In such case, resources are not allocate fairly as more resources (in terms of healthcare services) will be allocated to the high income earners while less resources are allocated to the low income earners. 4

5 Question 1(a) Level Mark range Descriptors L Excellent analysis + well-structured + good style of writing. Balanced analysis: Identify the causes of market failure correctly for 2 reasons: positive externalities and unfair distribution of resources (equity issue) with adequate depth in analysis + appropriate exemplification. L2 5-6 Correct but lop-sided analysis: Identify only positive consumption externalities correctly with adequate analysis and appropriate exemplification/application. Identify two reasons correctly but analysis is superficial or lacks adequate depth or has issues with exemplification. L1 1-4 Descriptive answer lacking in economic analysis. Mostly irrelevant answer (e.g. digressing into government intervention) 5

6 Examiner s Comment Part (a) This question focuses on healthcare services are not free but partially subsidised by government, hence it is hinting towards positive consumption externality. Students are required to explain the cause of market failure in details however some students focussed on explaining how subsidy can correct the market failure. The detailed explanation of the positive consumption externality is often missing. Please refer to the notes if you cannot remember. In addition, the area for deadweight loss on the diagram is identified wrongly by some students. The issue of equity is not explained by most students although the preamble already that such a policy would help to ensure that healthcare services remain affordable, especially for the lower income group. The analogy of fully subsidised meaning free for consumers, cannot to be taken that as such, healthcare is a public good. The characteristics of non-excludability and nonrivalrous for public good are not met in healthcare. Common Errors 1. Did not explain and provide examples of PMC, PMB and EMB. Correction / Explanation Refer to lecture notes. Yes, please read your notes, especially if you have not done so. Did not explain why Qm and Qs are market equilibrium quantity and socially efficiently quantity respectively. Did not explain why there is deadweight loss. Identify the wrong area representing deadweight loss. 2. Only stated that healthcare services would be affordable to the lower income group after subsidy (which is actually taken from preamble!). Stating this point alone is not sufficient to acquire a Level 2 mark range for equity issue. You need to explain the details. 6

7 (b) Discuss whether Singapore should adopt a fully subsidised system for healthcare services. [15] Introduction A fully subsidised model of healthcare meant that health care is provided FREE of charge to all users. The cost of provision is fully or 100% borne by the government and usually funded from tax revenue. A This is the system presently in use in the UK. Should SG adopt this system of health care is the issue for discussion. Body Thesis. SG should adopt fully subsidized health care system. Efficiency Special case when PE are very large see diagram. It is possible to achieve AE. Evaluative Comments: In reality this is unrealistic. Exemplification: In instances where external benefit is huge, for eg, a vaccination to protect against a deadly contagious disease like new strains of influenza, a full subsidy will be advantageous as it can help to contain the spread of the disease and spur more to go for the vaccination. Figure 3: Full Subsidy to internalise EMB from healthcare Price P S E PMC=SMC (assuming EMC=0) PMC subsidy P m Subsidy = EMB at Q S SMB = PMB + EMB P S s Q m PMB Q s F Quantity Theoretically, the government can provide subsidy to healthcare producers corresponding to the external marginal benefit (EMB), referring to Fig 3 above i.e. subsidy per unit = EMB at Q S (distance EF). This shifts the PMC downwards so that the new PMC (i.e. PMC subsidy), which coincides with the PMB at Q S. Hence, the new market equilibrium quantity where PMB = (PMC subsidy), now coincides with the socially efficient quantity QS, where SMB = SMC. 7

8 If the subsidy accurately reflects the external marginal benefit, individuals who received health care service are now in effect being compensated for the external benefit they bring to third parties as the price they are paying is now lower at Ps s, compared to Pm (price before the subsidy). The externality has thus been internalized. The government could now directly provide the healthcare service for free. This solves the issue of under-consumption of healthcare services. Equity Equity reasons Universal free health care => inclusive. Poor not excluded from access to health care (consider as basic essential good). A social safety net for those who fall ill and require expensive medical treatment. Evaluative Comments: In SG 100% subsidy only for pioneer generation hospitalization Healthcare is important because a person s survival or long term well-being will be severely affected if he is unable to afford the healthcare he needs. For the poor, a severe medical problem like suffering from cancer or kidney failure, will mean the dependency on free healthcare will be perceived as a necessity. Therefore if government is able to provide full subsidy for the treatment, this will help to reduce the impact of allocating resources to persons who may require them the most but may not be able to receive them due to the lack of ability to pay. Moreover, a full subsidy can be considered a more equitable form of financing as everyone is guaranteed access to healthcare regardless of income. Financing is from the government through progressive taxation, where the rich is expected to pay higher taxes and by doing so, this leads to greater equity. B Anti- Thesis.. SG should not adopt fully subsidized health care system Considering the subsidy perspective a Efficiency grounds: Over-consumption (Diagram) output above socially optimal. Qex > Qs (optimal output) Figure 3: Subsidy to internalise EMB from healthcare Price PMC=SMC (assuming EMC=0) P S E PMC subsidy Subsidy = EMB at Q S (optimal) P m SMB = PMB + EMB PMB F P S s Q m Q s Qex Quantity 8

9 Poor quality of service Free provision encourages free riding/free loading ie buffet syndrome. Consumption is at the output where PMB=zero. In reality, this translates into over-utilisation or heavy strain on existing capacity e.g hospitals are overcrowded and long waiting queues for consultations and operations etc Hospitals and doctors have to struggle to cope with high volume of patients. The quality of health care suffers as a result. Thus, poor quality service is detrimental to consumer welfare. Higher costs due to lack of market discipline to drive down costs. Free provision also creates a disincentive for the efficient provision of the service by the supplier as it is NOT driven by the profit-motive. There is no incentive for doctors and patient to cut costs as the cost is funded by taxpayers. Hence, there is productive inefficiency in the provision of health care. This implies that society as a whole suffers a welfare loss in terms of the inefficient use of scarce resources. b Strain on public finances Strain on government budget since subsidy is financed from tax revenue. Negative repercussions on public finance if health care expenditure keeps on rising e.g. OC or trade offs incurred cut back other forms of public expenditure e.g. education, defence. Possibility of imposing higher taxes + consequent negative impact on economic growth etc Evaluative comment: Very likely to happen in reality because free encourages free-riding/free loading excessive consumption or buffet syndrome. Government funding for free healthcare can be a drain on the government budget. As a country s population ages over time, the healthcare budget will grow tremendously if full subsidy provision continues into the future. Moreover, as we progress into the future, income in Singapore is expected to continue rising and along with it rising expectation. Greater demand for healthcare will occur as it is a normal good and government provision will be required to increase in the future. There is technological and pharmaceutical progress to be considered. Improvements made in healthcare area would mean a continually expansion of the array of services that can be provided. Where once no treatments were possible, it is now possible today. Such progress will whet the appetite of the people and this has the implication of greater government funding required. With these factors combining to place immense demands of the provision of free healthcare, the question to ask is can the government continue to retain the free subsidy structure. Extra Point In theory, free or zero pricing is valid for Public Goods. But health care is not a public good by definition. It is both excludable and rivalrous. It is likely that there are willing buyers and sellers (market can be both excludable and rivalrous) and the government does not need to provide free service to induce consumption in healthcare. If a person falls ill, he would simply choose a doctor whom he believes will help him get well and 9

10 is often willing and to pay for the treatment due to private benefits. So it may not be necessary for full subsidy to induce consumption as there is desired private benefit for a quick recovery. Conclusion: Subsidies are provided for health care because it is treated as a merit good in most countries. However, it is too farfetched for SG to adopt a system of universal FREE health care as it the case in UK. In Uk, the society is more politically egalitarian. Support funding for free healthcare on the basis of equity. Therefore more willing to pay high taxes and tolerant of inefficiencies in the system. In SG, situation is different. Less tolerant of inefficiencies and less willing to fund universal free health care or pay higher taxes. The preferred system which has been used successfully to date is a hybrid system of government subsidies cum co-payment. This system is aimed at striking a balance between efficiency and equity in the provision of health care. The subsidies are meant to make health care affordable to the majority of the population. At the same time, the co-payment system is to encourage the efficient use or consumption of health care services in Singapore. Level L L2 6-8 L1 1-5 Descriptors For a discussion that demonstrate good knowledge, application and balanced analysis. Adequate discussion on all requirements of the question with sufficient breadth and depth on positive consumption externality and equity issue. For a discussion that demonstrates mainly knowledge and application with little analysis. For a discussion that in which analysis is lop-sided (focussed only either on positive consumption externality or equity issue). For a descriptive & generic answer For an answer that is mostly irrelevant Lack of clarity and sound analysis Lacking in breadth and depth E1 1-2 Unsubstantiated judgement (1m) Largely unsubstantiated judgement (2) E2 3-4 Substantiated judgement 10

11 Examiner s Comment Part (b) Some students apparently do not understand the meaning of full subsidy, linking it to government directly undertaking the provision of healthcare as in public hospitals. Though the diagram of a full subsidy is not expected, there are still diagrams showing a normal subsidy and mistakenly assumed that it is the illustration of a full subsidy and go on with the erroneous analysis of the quantity and prices in the market. Some scripts neglected to elaborate and exemplify what PMC, PMB, EMB represent in the context of healthcare. While the fact that EMB is very large and hence full subsidy might be relevant is sometimes mentioned by some students, seldom is there exemplification of such healthcare services, like SARS & dengue vaccines. Equity issue was often mentioned from a generic perspective without reference to the context of healthcare. Stronger scripts mentioned that healthcare can be considered a basic necessity (such as in the case of UK), and therefore it would be unfair if a person was denied healthcare if he/she could not afford it. Common Errors 1. When drawing a diagram to explain the policy of subsidy, students drew a rightward shift of PMB students drew a downward shift of PMC but indicated PMC + Subsidy or SMC - Subsidy 2. When explaining full subsidy, the diagram drawn did not represent full subsidy. That is, diagram shows that consumers still have to pay a price to consume healthcare. 3. Students explained that healthcare is a public good. Correction / Explanation Subsidy shifts the PMC curve downwards by the amount of the EMB at Qs! You should indicate the curve as PMC - Subsidy. You should show a diagram where consumers pay a ZERO price after full subsidy from government. With the correct diagram drawn, you would be able to provide an in-depth discussion. Healthcare services are excludable and rivalrous so by definition, healthcare services are not public good. 11