Wk 7 Mkt Failure Healthcare

7/31/2019 Wk 7 Mkt Failure Healthcare

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H1 Economics - Lecture

Term 2 Week 7

Market Failure Essays


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Paragraph Writing Skills

PEEL THE ISSUE. PEEL PEEL PEEL!
http://www.ajewelrystyle.com/wp-content/uploads/2011/03/orange-peel.jpg


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P E E L


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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


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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 tohealthcare: Therefore, determine source of

market failure


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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


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Sequence involved in answer

Identify Market/product: Healthcare

Identify agent/party: Consumer/producer

Identify activity: consumption/production


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Sequence involved in answer -

It helps to begin analysis with scenario

involving no spill over

Describe MPC and MPB with respect to

healthcare market


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In a free market equilibrium, the equilibrium

is where Marginal Private Benefit (MPB) =

Marginal Private Cost (MPC) with outputequals to Qe units.

Assuming no negative externalities, MPC is

equal to Marginal Social Cost (MSC).


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Qty of Healthcare services

consumed/produced

MPC

MPB

Pe

Qe

How do Externalities lead to market failure?

Cost/Benefit No Externalities

MEC = 0

MEB = 0

= MSC

= MSB

MSB = MSC (max society welfare)

What if externalities exist?


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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


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Positive externalities associated with the

consumption of healthcare: E.g. - when youare vaccinated against whooping cough youare not the only person to benefit.

Other people also gain because they are nowprotected against catching whooping coughfrom you. This extra or externality benefit ismissed by the free market.


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Third parties, close to these healthy

individuals, therefore, also benefit becausethe chances of getting sick is reduced and as

such, productivity as a whole can be

increased, which is the external benefitresulting from the consumption of healthcare.


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Diagram: Illustrate/explain how the output

that maximises net private gain deviates from

the socially desirable level of output.


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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.


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Positive externalities . society accrue external benefits .

Qty of Healthcare

services consumed

MPC

MPB

Qe

Cost/Benefit

Less likely to get ill

Improved productivity

MEB

MEB

MEBMSB

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


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Positive externalities lead to under consumption.

Allocative efficiency is not achieved as societys

welfare can be increased without making anotherindividual worse off through the reallocation of

resources

Government intervention would be required


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Positive externalities . society accrue external benefits .


consumed

MPC

MPB

Qe

Cost/Benefit

MEB

MSB

MEC = 0= MSC

Qpe

MSB = MSC

Socially optimal

output

Market

output

Deadweight loss



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Therefore given that:

Positive externalities lead to under consumptionand

Allocative efficiency is not achieved as societyswelfare can be increased without making anotherindividual worse off through the reallocation of

resources resulting in a deadweight loss untosociety

Government intervention would therefore berequired


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)


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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 DiscusswhetherYes? No?

Also are interventions sufficient?

Rationale for intervention provided in part (a)

Answer requires assessment of current

interventions (effectiveness)

b) h h h


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Restate need for intervention: Positive externalitiesleading to under consumption

Identify measures adopted by the Singaporegovernment in its intervention in the healthcaremarket.

- subsidies/transfer payments

- direct provision- Legislation

- moral suasion

b) i h h h i i i


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Subsidies

Usually targets producers: The government can

attain the socially efficient level of productionthrough providing subsidies to health-care providers

E.g. reducing the training cost of doctors and other

medical professional to increase the level ofhealthcare services) and government provision for

health checks.

H1 Economics Market Failure Part 3: Government Intervention


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Qty of healthcare services

produced

MPC

MPB

Qe

Cost/Benefit

MEB

MSB

= MSC

Qe

Socially

optimal

output

Market

output

How do Positive Externalities lead to market failure?

Subsidies

MPC+Subsidies

Subsidies

b) Di h h h i i i


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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) Di h th th t i t ti i


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Transfer payments

- Targets Consumers: Government can address theissue of under-consumption by providing transferpayments to consumers.

- The government can intervene to encourageconsumption of preventive healthcare by offering

cash grants per unit amounting to the marginalexternal benefit (MEB). This cash grant must bespent on health checks only



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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.


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Effectiveness of subsidies and TPs :

Whether net economic welfare of society can be

improved or maximised depends on the accuracy ofestimating the MEB thus determining the exact

amount of cash grant per unit to be given.

Too much may result in overconsumption/production

b) Disc ss hether the c rrent inter entions in


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If the amount ofMEB is over-estimated, it will lead

to over-consumption and substantial wastages ofresources, which can result in an even greater

welfare loss than without government intervention.

Moreover, taxes have to be imposed to financesubsidies.



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Last but not least, the opportunity costs for

providing subsidies/transfer payment needs to beconsidered too as these funds can be channelled to

other purposes.


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consumed

MPC

MPB

Qe

Cost/Benefit

MEB

MSB

= MSC

Qe

Socially

optimal

output

Market

output


Government Provision



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Direct Provision

Government provides healthcare: limitations

overconsumption and long queues may arise ifhealthcare 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



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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.



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Legislation

Government has intervened in healthcare is through

legislation.

compulsory for Singaporeans earning an income tocontribute to their own Medisave accounts to meet

their personal or their dependants' hospitalization

expenses, especially after retirement.



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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.


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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.


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Qty of Healthcare

services consumed

MPC

MPB

Qe

Cost/Benefit

MEB

MSB

= MSC

Qe

Socially

optimal

output

Market

output


Legislation/Education



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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 along term solution and these programmes require

funding too.



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Conclusion

- Due to the intense dependence on human resources

for economics growth in Singapore; polices are

designed to address the significant positiveexternalities that exist in the healthcare market

- Despite the limitations of individual policies as

discussed, the Singapore governments use of a mixof policies which have helped to tackle the various

aspects of market failure to a large extent.



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Conclusion

- As a result, these government interventions are

largely sufficient at this moment in time to cater tothe needs of Singaporeans.

Wk 7 Mkt Failure Healthcare

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