JC Economics Essay Series #8 – Market Failure & Healthcare

JC Economics Market Failure & Healthcare Essay Model Answers 

Are you aware that you are guaranteed one Market Failure topic question in your UCLES – SEAB GCE “A” Levels for H2 Economics? That’s we at Adam Smith Economics Tuition, we over-prepare you for this topic, so that, regardless of the difficulty level of the question, you are able to answer it. Be it a case the positive externalities such as healthcare, or market imperfections such as imperfect information, you will be bale to conquer it and secure your Level 3 answer.

After all, you need to answer at least one Micro Econs question in Section A of your eventual Cambridge  A-Level Economics exams.


(a) Explain the possible market failures in the market for healthcare. [10]

(b)Discuss whether the current interventions in the market for healthcare by the Singapore government are sufficient. [15]


JC Economics Essay – Market Failure: Application & Analysis to Healthcare Context

Suggested Answer Part (a): (Causes & Effects Question)

Government should intervene in the market for healthcare as the equilibrium in an unregulated healthcare market fails to achieve a socially optimal efficient allocation of resources. There are various reasons why market failure occurs and these reasons include positive externalities from the consumption of healthcare, imperfect. information, income inequity and market dominance. Because of these reasons, allocative efficiency is not achieved as the society’s welfare can be increased without making another individual worse off through the reallocation of resources, which therefore calls for government’s intervention.


First of all, due to the presence of positive externalities, healthcare is considered a merit good as it is deemed desirable by the government and yet is perceived by the government to be under-consumed. Positive externalities are beneficial side effects of production or consumption on persons other than those who produce or consume them. Those people who consume healthcare stays healthy and are able to exhibit their full potential in their daily activities (private benefit). In addition, third parties, close to these healthy individuals, also benefit because the chances of getting sick is much reduced and as such, productivity as a whole can be increased, which is the external benefit resulting from the consumption of healthcare.


healthcare positive externalities | Econs Tutor SG


In a free market equilibrium, the equilibrium is at Eo, where Marginal Private Benefit (MPB) = Marginal Private Cost (MPC) with output equals to 0Qo units. Assuming no negative externalities, MPC is equal to Marginal Social Cost (MSC). The existence of positive externality creates a divergence between the MPB and marginal social benefit (MSB) curves as shown in Figure 1 above. This divergence shows the amount of marginal external benefit (MEB) at each output level. Allocative efficient point is at E₁, where MSB is equal to MSC with the socially desired output level at OQ, units. Therefore, if left to the free market, there is under-consumption of healthcare by QoQ₁ units because consumers ignore the existence of MEB as consumers pursue their own interests, which justifies for government intervention. In addition, due to the under-consumption, it results in a deadweight loss of area AE0E1.


Besides positive externalities, consumers might also under or over consume healthcare services because of imperfect information. First of all, individuals may not be able to value their private benefits and costs correctly, especially when individuals might undervalue the long term private benefits of consuming healthcare. If this is the case, the extent of under consumption, without government intervention, will be even more serious. On the other hand, the existence of asymmetric information between doctors and patients may result in overconsumption of healthcare services. As doctors have more information/knowledge than consumers in the amount or type of healthcare needed, doctors may over-prescript what is necessary for patients so as to earn additional profits, thus resulting in overconsumption by patients.


In addition, inequity in income distribution is regarded as a form of market failure. Goods and services are allocated in the free market according to the willingness and ability of individuals to pay. However, not all individuals will be able to pay for the consumption of healthcare. As such, government will have to step in to ensure that this group of people is not left out as the society progresses and to ensure that a basic level of healthcare is made available to this group of people.


Last but not least, if the government do not intervene in the healthcare market, it is highly likely that few dominant healthcare providers might emerge and take over the whole market in the long run. Without government intervention, these firms will have the opportunities to exploit consumers by restricting output and increasing prices in order for them to gain supernormal profits, thus leading to allocative inefficiency. Moreover, inefficiencies might result as they might not bring in the latest and cost effective measures/treatment for the local population since they possess the market power.


In conclusion, there are many grounds on market failure that calls for government intervention in the market for healthcare.


Econs tutor’s comments: Other possible failures are imperfect information, including asymmetric info. This is an eg of positive externality. One example of a negative externality is congestion.


JC Economics Healthcare Microeconomic Policy Options – Evaluation

Suggested Answer Part (b): (Evaluation of Policies Question):

Singapore government intervenes in the market for healthcare through subsidies, direct provision of healthcare, regulation and moral suasion to tackle the various problems brought about by market failure.


First of all, the government provides subsidies or transfer payments to increase the consumption of healthcare. There are two methods in which the government gives out subsidies or transfer payments. One method is to provide subsidies to producers of healthcare for doctors’ training costs or for patients’ stay at government hospitals. This will make the healthcare available at a lower price and thereby encouraging consumption. Another method is to give transfer payments to consumers, for example giving a one-time grant to citizens’ Medisave account where citizens can only spend this money on healthcare. Both of these methods increase the consumption of healthcare and move equilibrium quantity of healthcare consumed towards the social equilibrium level f consumption in Figure 1.


However, it is 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. 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 for these subsidies. Last but not least, the opportunity costs for providing subsidies/transfer payment needs to be considered too as these funds can be channeled to other purposes.


Secondly, Singapore government provides healthcare services directly through government hospitals for inpatient services and polyclinics for outpatient services. Government provision also set the benchmark for the private sector on professional medical standards and fees. By engaging directly in the provision of healthcare, it greatly reduces the market power that private hospitals and clinics have, thus keeping the prices of healthcare provision in check.


However, the direct provision of healthcare by government has its limitations too. For instance, 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. Another limitation is that 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.


The third way in which government has intervened in healthcare is through legislation. Singapore government has make it 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. Singapore has put Medisave in place as individuals usually underestimate the amount of money needed to pay for their medical bills due to imperfect knowledge. As such, Medisave can help citizens to cater aside a sum of money to handle their medical bills. Next, to increase consumption due to lack of information, it is also compulsory in Singapore to undergo certain immunization during childhood e.g. diphtheria and measles.


Another intervention by the government to reduce imperfect knowledge is through 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. These include anti-smoking campaigns, introduction of the National Healthy Lifestyle Programme, creating awareness for AIDS and encouraging women to have regular checkups for breast cancer. 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.


Despite the limitations of the various policies implemented by Singapore government as discussed above, the mix of policies which Singapore government has implemented have helped to tackle the various aspects of market failure to a large extent. In addition, the government has also undertaken measures to minimize the limitations of each policy. As a result, these government interventions are largely sufficient at this moment in time to cater to the needs of Singaporeans.


For such Market essay question, you should be able to answer any type of externalities, be it positive or negative, as long as you have a step by step approach to it. Targeting at least 19 out of 25 marks for your H2 essays for questions on divergences and market imperfections? Join us for your accelerated success to Economics ASAP!