JC Economics Essay Merit Goods & Subsidy Policy Model Answers
The most common type of market failure is that of a merit / demerit good, arising from either information failure or a divergence between private and social benefits / costs. In S’pore, the most important merit goods are education, housing and healthcare.
Even before the onset of COVID-19, healthcare has been the most significant merit good, given the unique situation of our economy. The following question is one good example of a local context essay question.
In Singapore, cancer is the number-one killer disease. Through regular screening, cancer can be detected early where treatment is generally more successful.
(a) Explain the terms public good and merit good, and explain whether screening for cancer is likely to be a public good or a merit good. 
(b) Discuss the view that subsidising such cancer screenings is a better policy option than to embark on costly health campaigns. 
JC Economics Essay – Merit Good & Public Goods
Define Merit Good: A good that is deemed socially desirable by the government but will be under consumed if it is left to the free market.
Public good: A good that fulfills the 2 characteristics of non-rivalry and non-excludable.
Screening for cancer is considered to be more a merit good as it is deemed to have positive externalities. Positive externalities are spillover benefits on 3rd parties who are not directly involved in the production or consumption of the good.
Identify the MPB and MPC of screening for cancer. MPB includes the benefits to the individual from early detection of cancer. This will be a longer lifespan, higher life time income and the non material benefits of
MPC includes the cost of screening itself. Identify MEB: MEB may include the productivity of the workforce due to the lack of illness.
Explain that with free market, consumption level will be at MPB-MPC and the benefits of MEB will be ignored. This results in consumption of cancer screening to be below the socially optimum level of MSC = MSB. This results in dead-weight loss to society.
On top of that, imperfect information may be the reason why there is under-consumption in the economy. Participants are not aware of the benefits of early detection, thus under consumed when left to the free market. Due to the lack of awareness of the dangers of cancer or the benefits of early detection, consumers may perceive the MPB to be lower than the true value. This results in free market equilibrium of MPB = MPC to be lower than the socially optimum level.
Why screening for cancer is NOT a public good:
Explain the 2 characteristics of a public good. Highlight that screening for cancer bears a cost to society when it is consumed by an individual as there is additional cost incurred for additional users to be screened for cancer. On top of that, it is excludable as hospitals and clinics can prevent non-payers from the screening.
Note from A-Level Econs tutor:
1. Even if the government provides free for all citizens, screening services for cancer is non-excludable but still rival in consumption.
Able to identify that screening for cancer cannot be a public good as it is unable to fulfil the 2 characteristics of a public good.
JC Economics Essay – Gov Intervention: Subsidy Policy for Merit Good
Introduction: Identify that subsidy and education campaigns are 2 possible measures used by government to correct the market failure of cancer screenings and both have their benefits and limitations
Subsidy works better than education campaigns.
Subsidy given out to clinics specifically for cancer screenings will lower the cost of cancer screenings by the amount of the subsidy. This will shift MPC down and if subsidies are equal to MEB, then this will achieve a equilibrium level where socially optimum level of consumption is. Subsidies are more effective because they allow market forces to operate, shifting resources of patients. as well as clinics towards provision of cancer screening. With a lower price, patients will be inclined to pay for cancer screening, forgoing consumption of other items. For clinics, the subsidy allows them to gain higher revenue and yet pass part of the subsidy to patients, thus lowering price of cancer screenings. Subsidies may be more effective in the short run as they tackle directly the self-interest aspect of people. Lowering price will lead to increase quantity demanded.
The problem with education is that, they rely on persuasion rather than specifically the self-interest (cost) motive of people. Advertising campaigns are also notorious for being unpredictably in its effects. Even if campaigns are effective in getting the message across, there will be opportunity cost of the resources being diverted towards more specific usage like better equipment for cancer screenings in clinics and hospitals. Thus high cost may result in screening to be out of the reach of the lower income groups.
Education is still effective, limitations to subsidies and alternative measures to increase cancer screening.
Subsidies may be able to reduce the cost of cancer screening in clinics, but they are generally ineffective in creating awareness of the benefits of early detection of cancer. This is where education campaigns are more effective. By highlighting the benefits of early detection, consumers have better Information (as stated in part ‘a’ where the market failure could be due to imperfect information) and will choose to increase their consumption even if price has not been reduced, shifting MPB to the right. Education campaigns can also have a lower cost to the patient and also the government in the long run as when cancer screenings become part and parcel of a patient’s request in his annual checkup, there will be lesser need for such campaigns.
On top of that subsidies tend to be difficult to be removed once it is implemented. Subsidies without the aid of advertising campaigns may prove fruitless if people of various ethnic groups or lower educated groups are unaware of it. Often, the cause of low levels of cancer screening is due to the lack of awareness of its benefits, rather than the cost of screening discouraging patients from it.
Which policy is good for SR and LR respectively?
Potential adjustments for policies?
Example: Government can impose certain regulations if they feel that the MEB of cancer screening is significantly large. An example could be compulsory cancer screening in corporate health plans for employees. This may ensure that the majority of the people will undergo cancer screenings. However, such legislation may prove difficult to implement as the cost incurred may be substantial, resulting in higher cost for firms (if they are footing the health plans) or for patients.
Subsidy good for mid term. Campaigns for mid to long term.
Can even made it compulsory for short term (This is the same case for COVID testing in SG since late 2020.) Specifically, we have the ANTIGEN RAPID TEST (ART) and the Polymerase Chain Reaction (PCR) tests
JC Econs Tuition Teacher’s Comments:
1. This is a relatively easy qn. Consider if you really need to ex[lain both +ve EXT and info failure for merit good. Not always, we will need to do so.
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