(2016) A Level H2 Econs Essay Q2 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)

(2016) A Level H2 Econs Paper 2 Essay Q2

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2. Singapore’s spending on healthcare is about 4% of GDP. This is lower than many developed countries. However, Singapore’s population is ageing and economic growth may not be as high as before. The government’s share of national healthcare expenditure is expected to rise from 33% in 2012 to over 40% in the future. 
Source: Adapted from Singapore Public Sector Outcomes Review, 2014

(a) Explain why a government intervenes in the provision of healthcare. [10]

Introduction 

  1. The government intervenes in healthcare as healthcare is a merit good 

  2. A merit good is deemed by the government to be socially desirable but yet underconsumed 

  3. Underconsumption of healthcare can be due to presence of positive externalities, imperfect information or income inequity 

  4. In this essay we will discuss how underconsumption of healthcare occurs due to positive externalities & imperfect information 

Positive externalities 

  1. When individuals consume healthcare, they consider their own private costs and private benefits 

  2. Private costs from consuming healthcare can include cost of treatment, time taken while private benefits from consuming healthcare can be the benefits from better health, increased well being 

  3. Positive externalities are generated in the consumption of healthcare. Positive externalities are benefits received by third parties not directly involved in the production or consumption of the good 

  4. In the case of healthcare, individuals tend to ignore the external benefits of receiving healthcare 

  5. Healthier workforce – higher productivity (enjoyed by employers) 

  6. Reduce risks of spreading diseases & illnesses (enjoyed by those in close contact) 

  7. Reduced state spending (enjoyed by taxpayers in general) 

  8. These positive externalities are expressed as Marginal External Benefits (MEB) on Figure 1 

  9. The presence of MEB causes a divergence between Marginal Social Benefits (MSB) and Marginal Private Benefits (MPB) 

  10. Individuals consume at Qm where MPC = MPB while the socially optimal level of output is at Qs where MSC = MSB 

  11. Underconsumption occur since Qs > Qm and there is presence of a deadweight loss 

 

Imperfect information 

  1. In consuming healthcare, individuals also tend to suffer from imperfect information 

  2. For example, individuals may not be keenly aware about the true benefits of receiving healthcare on a regular basis e.g. benefits of going for periodic health checkups after 40 can increase the likelihood of diagnosing diseases earlier on, resulting in longer lifespan and better prognosis 

  3. The perceived MPB is therefore lower than the actual MPB 

  4. Individuals consume healthcare at a level where their perceived MPB = MPC at Qm instead of the actual MPB = MPC at Qs 

  5. There is therefore underconsumption caused by imperfect information 

  

b. Discuss how the opportunity cost of increased healthcare expenditure differs, depending on whether it is financed by individuals or the Singapore government. [15]

Introduction 

  1. Opportunity cost is the next best alternative forgone 

  2. For individuals, the opportunity cost of increased healthcare expenditure could be forgone spending on other goods & services e.g. on spending on education, food or leisure 

  3. For the government, the opportunity cost of increased healthcare expenditure could be forgone spending on other government projects e.g. building infrastructure such as roads, schools or railway links and potential transfer payments made to lower income households and the unemployed 

 

Loss of external benefits if financed by individuals 

  1. As mentioned in a), when individuals make a decision to consume healthcare, they will likely ignore the presence of external benefits 

  2. Any increase in healthcare expenditure would be decided entirely based on individuals’ private costs and benefits (or a change in) 

 

Moral hazard if financed by Singapore government 

  1. If increased healthcare expenditure is financed by the Singapore government, individuals do not bear the burden of the increased expenditure 

  2. Moral hazard could occur when individuals to not have to bear the cost associated with increased healthcare needs, and individuals may take on more risky / less healthy activities e.g. poor diet / not exercising / less care taken in daily activities knowing that any increase in healthcare expenditure is borne by the government 

  3. Demand for healthcare could increasing causing healthcare expenditure to be higher when borne by the Singapore government as opposed to by being borne by individuals 

 

Opportunity costs when financed by individuals vs financed by the Singapore government 

  1. In U.K., any increase in healthcare expenditure is financed entirely by the UK government as healthcare is directly provided by the government for free - while this internalises the external benefits, there is a likelihood of overconsumption due to moral hazard 

  2. When considering the total per capita spending on healthcare(in PPP terms), the UK spends more than Singapore and yet health outcomes (life expectancy, infant mortality rate) for Singapore are better. 

  3. This could imply that the collective opportunity costs to society associated with the Singapore government financing any increase in healthcare expenditure would be higher than if individuals financed increases in healthcare expenditure. 

  4. I.e. when left to the Singapore government to finance increased healthcare expenditure, the total amount spent would likely be higher than if individuals financed the total healthcare expenditure. Yet, the opportunity costs of such higher spending would affect individuals (and society at large) assuming higher taxes may be collected to finance such higher expenditure, leaving the individual less to spend on other goods & services. 

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