H1 Economics - Lecture

Term 2 Week 7 Market Failure Essays

Paragraph Writing Skills

PEEL THE ISSUE. PEEL PEEL PEEL!

Analyse why the government should intervene in the market for healthcare [12] b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]

P E E L

Analyse why the government should intervene in the market for healthcare [12]

In Planning: Identify..
Direction word: Analyse Analyse why

Why: Give reasons

Determine point of view/perspective: Government Context: Healthcare Market

Analyse why the government should intervene in the market for healthcare [12]
Issues to think about

If the government is required to intervene there has to be an issue or problem.

What is that problem?

Identify why market fails with respect to healthcare: Therefore, determine source of market failure

Analyse why the government should intervene in the market for healthcare [12]
Issues to think about

So what if market fails? What is the significance for resource allocation with respect to the healthcare market

Is the a socially optimal efficient allocation of resources

Analyse why the government should intervene in the market for healthcare [12] Sequence involved in answer Identify Market/product: Healthcare Identify agent/party: Consumer/producer

Identify activity: consumption/production

Analyse why the government should intervene in the market for healthcare [12] Sequence involved in answer It helps to begin analysis with scenario involving no spill over Describe MPC and MPB with respect to healthcare market

Analyse why the government should intervene in the market for healthcare [12]
Identify MPB and MPC - Marginal Private Benefit (MPB): people who consume healthcare stay healthy and are able to exhibit their full potential in their daily activities - Marginal Private Cost (MPC): costs involved in the purchase of healthcare. Fees, charges, etc.

Analyse why the government should intervene in the market for healthcare [12]

In a free market equilibrium, the equilibrium is where Marginal Private Benefit (MPB) = Marginal Private Cost (MPC) with output equals to Qe units.
Assuming no negative externalities, MPC is equal to Marginal Social Cost (MSC).

How do Externalities lead to market failure?

Cost/Benefit

No Externalities

MEC = 0 MEB = 0

MPC = MSC Pe

Qe

MSB = MSC (max society welfare)

MPB = MSB
Qty of Healthcare services consumed/produced

What if externalities exist?

Analyse why the government should intervene in the market for healthcare [12] Sequence involved in answer Establish possible third party/spillover effects of activity.

In this case due to a positive impact on third parties a positive externality (define) is generated.
Therefore, a separate MSB exists suggesting a deviation between MPB and MSB

Analyse why the government should intervene in the market for healthcare [12] Sequence involved in answer Positive externalities associated with the consumption of healthcare: E.g. - when you are vaccinated against whooping cough you are not the only person to benefit. Other people also gain because they are now protected against catching whooping cough from you. This extra or externality benefit is missed by the free market.

Analyse why the government should intervene in the market for healthcare [12] Sequence involved in answer Third parties, close to these healthy individuals, therefore, also benefit because the chances of getting sick is reduced and as such, productivity as a whole can be increased, which is the external benefit resulting from the consumption of healthcare.

Analyse why the government should intervene in the market for healthcare [12] Diagram: Illustrate/explain how the output that maximises net private gain deviates from the socially desirable level of output.

How does Positive Externalities (consumption) lead to market failure? Positive externalities . society experiences external benefits

Cost/Benefit
MEB

MSB = MSC

Qe

MPC = MSC MEC = 0

MSB
MPB
Qty of Healthcare services consumed

Market output

Qs

Socially optimal output

Analyse why the government should intervene in the market for healthcare [12]
The existence of positive externality creates a divergence between the MPB and marginal social benefit (MSB) curves as shown in the diagram.
This divergence shows the amount of marginal external benefit (MEB) at each output level.

How does Positive Externalities (consumption) lead to market failure? Positive externalities . society accrue external benefits .
Less likely to get ill Improved productivity

Cost/Benefit

MEB

MPC
MEB MEB

Qe

MPB

MSB

Qty of Healthcare services consumed

Analyse why the government should intervene in the market for healthcare [12]
Positive externalities lead to under consumption. Allocative efficiency is not achieved as societys welfare can be increased without making another individual worse off through the reallocation of resources

Government intervention would be required

Analyse why the government should intervene in the market for healthcare [12]
The socially desired output level at Qp where MSB is equal to MSC . Here there is allocative efficiency. If left to the free market, there is underconsumption of healthcare by Qp - Qe units because consumers ignore the existence of MEB as consumers pursue their own interests, justifying government intervention. In addition, due to the under-consumption, it results in a deadweight loss (yellow area).

How does Positive Externalities (consumption) lead to market failure? Positive externalities . society accrue external benefits .

Cost/Benefit
MEB

MSB = MSC

Qe

MPC = MSC MEC = 0

Deadweight loss

MPB

MSB

Market output

Qpe

Qty of Healthcare services consumed

Socially optimal output

Analyse why the government should intervene in the market for healthcare [12]
Therefore given that:

Positive externalities lead to under consumption and

Allocative efficiency is not achieved as societys welfare can be increased without making another individual worse off through the reallocation of resources resulting in a deadweight loss unto society Government intervention would therefore be required

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]

What are direction words? Discuss

Question asks Discuss whether Yes? No?

Also are interventions sufficient?

Rationale for intervention provided in part (a)

Answer requires assessment of current interventions (effectiveness)

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Restate need for intervention: Positive externalities leading to under consumption Identify measures adopted by the Singapore government in its intervention in the healthcare market. - subsidies/transfer payments - direct provision - Legislation - moral suasion

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Subsidies Usually targets producers: The government can attain the socially efficient level of production through providing subsidies to health-care providers
E.g. reducing the training cost of doctors and other medical professional to increase the level of healthcare services) and government provision for health checks.

H1 Economics Market Failure Part 3: Government Intervention

How do Positive Externalities lead to market failure?

Subsidies
Cost/Benefit
MEB

Qe

MPC = MSC
Subsidies

MPC+Subsidies

Qe

MPB

MSB

Qty of healthcare services produced

Market output

Socially optimal output

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Subsidies This measure rewards first parties for bringing benefits to third parties More production can take place, leading to a more efficient level of resource allocation

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Transfer payments - Targets Consumers: Government can address the issue of under-consumption by providing transfer payments to consumers. - The government can intervene to encourage consumption of preventive healthcare by offering cash grants per unit amounting to the marginal external benefit (MEB). This cash grant must be spent on health checks only

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Transfer payments Eg. a one-time grant to citizens Medisave account or a Medisave top-up where citizens can only spend the money on healthcare. This will shift demand for healthcare to the right. This shifts the MPB curve up to where the MSB is.

- This method increases consumption of healthcare and moves equilibrium quantity of healthcare consumed towards the social equilibrium level of consumption.

How does Positive Externalities (consumption) lead to market failure? Cost/Benefit

MEB

Transfer Payments
MPC = MSC

Qe

Qe

Transfer Payments

MPB

MSB+Transfer Pymnts

Qty of Healthcare services consumed

Market output

Socially optimal output

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Effectiveness of subsidies and TPs : hard to determine the required size of subsidy/transfer payment as it is difficult to calculate the MEB derived from consumption of healthcare by the society. If the amount of MEB is under-estimated, it may not be adequate to push equilibrium quantity to the social optimum level as some individuals are still unable to afford healthcare.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Effectiveness of subsidies and TPs : Whether net economic welfare of society can be improved or maximised depends on the accuracy of estimating the MEB thus determining the exact amount of cash grant per unit to be given. Too much may result in over consumption/production

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Effectiveness of subsidies and TPs : If the amount of MEB is over-estimated, it will lead to over-consumption and substantial wastages of resources, which can result in an even greater welfare loss than without government intervention. Moreover, taxes have to be imposed to finance subsidies.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Effectiveness of subsidies and TPs : Last but not least, the opportunity costs for providing subsidies/transfer payment needs to be considered too as these funds can be channelled to other purposes.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13] Direct Provision: Government supplements healthcare services through government hospitals for inpatient services and polyclinics for outpatient services.

H1 Economics Market Failure Part 3: Government Intervention

How does Positive Externalities (consumption) lead to market failure? Cost/Benefit

MEB

Government Provision
MPC = MSC

Qe

MPB Qe

MSB

Qty of Healthcare services consumed

Market output

Socially optimal output

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13] Direct Provision
Government provides healthcare: limitations overconsumption and long queues may arise if healthcare services are provided for free. However, this is not the case in Singapore because the financing philosophy of Singapore's healthcare delivery system is based on individual responsibility and community support

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Direct Provision Also bureaucracies in the government sector and the lack of profit incentive when government directly provide for healthcare may lead to under-investment or reduction in efficiency and quality. However, this is also largely taken care of as Ministry of Health (MOH) establishes a budget for each hospital to ensure that hospitals operate as efficiently as possible.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Legislation Government has intervened in healthcare is through legislation. compulsory for Singaporeans earning an income to contribute to their own Medisave accounts to meet their personal or their dependants' hospitalization expenses, especially after retirement.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Legislation Government has intervened in healthcare is through legislation. Compulsory vaccinations - it is also compulsory in Singapore to undergo certain immunization during childhood e.g. diphtheria and measles.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Education/moral suasion
- Through advertisements and health promotion campaigns, Health Promotion Board (HPB) has been consistently encouraging Singaporeans to stay healthy through preventive healthcare programmes and promoting a healthy lifestyle.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Education/moral suasion
- These include anti-smoking campaigns, introduction of the National Healthy Lifestyle Programme, creating awareness for AIDS and encouraging women to have regular check-up's for breast cancer.

How does Positive Externalities (consumption) lead to market failure? Cost/Benefit

MEB

Legislation/Education
MPC = MSC

Qe

MPB Qe

MSB

Qty of Healthcare services consumed

Market output

Socially optimal output

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Education/moral suasion - Since the introduction of these programmes, HPB has instilled in Singaporeans the importance of a healthy lifestyle, maintaining healthy body weight and equipping Singaporeans with the knowledge and skills to practice healthy lifestyle. - However, the imposition of these programmes is a long term solution and these programmes require funding too.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Conclusion - Due to the intense dependence on human resources for economics growth in Singapore; polices are designed to address the significant positive externalities that exist in the healthcare market - Despite the limitations of individual policies as discussed, the Singapore governments use of a mix of policies which have helped to tackle the various aspects of market failure to a large extent.

b) Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [13]
Conclusion - As a result, these government interventions are largely sufficient at this moment in time to cater to the needs of Singaporeans.