2023 DHS Prelims Paper 1 Answers

1 H2 Economics Prelims CSQ 1 (a) Would public health programmes to track disease outbreaks and set safety standards be considered as public goods? Justify your answer. [4] Yes, because these two programmes are meant to ‘promote and protects the health of all people and their communities ’, ‘prevent people from getting sick or injured in the first place ’ and ‘ focuses on entire populations ’ (extract1). To be specific they are non-excludable, non-rivalrous and non-rejectable in nature. [1] Safety standards and the tracking system are non-excludable. Producers are either unable to or find it is prohibitively costly to exclude non-payers from enjoying the benefits of the safety standards or the tracking system once they are produced. For example, infection control measures, such as hand hygiene, isolation precautions, environmental cleaning, and medication safety, are designed to be applied uniformly to all patients within a healthcare facility to protect all patients from potential harm. Disease outbreak tracking are designed to benefit an entire population or community. Once in place, typically applied universally to prevent the spread of disease [1] Once safety standards or the tracking system are set up, it is non-rival in consumption. The consumption of the standards and the system by one person does not reduce the quantity available for others to consume and benefit from. For example , the development and adherence to safety protocols for medical procedures do not diminish the benefits for other patients undergoing similar procedures. The surveillance and reporting of disease cases do not decrease the program's ability to identify and respond to cases in other individuals too. [1] Safety standards and the tracking procedure are also non-rejectable. Such public health program focuses on promoting and protecting the health of all people and their communities and prevent people from getting sick or injured. The collective supply of safety standards and tracking procedure for all, means that it cannot be rejected by the beneficiaries. For example, some safety standards and tracking procedure are mandated by laws and regulations and failing to comply can lead to disciplinary actions or legal consequences. [1]

2 (b) Using Figures 1 and 2, describe the main features of US healthcare spending per capita, both over time and compared with other countries. [2] From Figure 2, • since growth rate of healthcare spending per capita had been consistently positive, we can conclude that US healthcare spending per capita has been increasing since 1980s. [1] or • However, since the growth rate had been falling, we can conclude that the rate of increase in US healthcare spending per capita has fallen over the years. [1] From Fig 1, • US healthcare spending per capita is the highest among the countries listed or • US healthcare spending per capita is more than twice the amount the rest of the countries spent on average. [1]

3 Note – Given the phrasing of the question, will need to describe US healthcare spending per capita, both over time and compared with other countries. One observation per category to get 2 marks. (C) Explain two likely sources of market failure in the healthcare industry [6] Based on Extract 1, unlike public health programme which are largely public goods, the healthcare industry treats people who are sick and focuses on individual patients. Hence they are private goods. Regardless, there are sources of market failure. [Positive Externalities] One likely source is the generation of positive externalities. From extract 2, ‘Early prevention” such as annual health screening to detect chronic illnesses can lead to positive externalities as it can ‘reduce the long-term healthcare costs for the society.. lead to healthier individuals .. enhances overall workforce productivity and economic output’ The generation of positive externalities imply the MSB is above MPBactual. Considering the full benefits of the healthcare screening to the society, the socially optimum output should only be QS, where MSB = MSC. However, rational decision-making by individuals, acting in pursuit of their self-interest, disregard the MEB. As such, they consume up to QP, the point where the last unit of healthcare screening consumed brings them as much benefits as it costs them to consume it, i.e. where MPBperceived = MPC. There is thus under- consumption of QPQS units of healthcare screening in the free market. The last unit consumed (QP) adds more to society’s benefit than it does to society’s cost, indicating that society’s welfare can be increased further by consuming more of the good. The under-consumption of QPQS units results in the society forgoing additional benefit of QScaQP while avoiding the additional cost of QScbQP. Since the additional benefit to society is greater than the additional cost had, consumption been increased to QS, the society experiences a welfare loss or deadweight loss given by the area abc as the potential welfare gain is forfeited -> market failure.

4 [Imperfect information] From Extract 2, it was also highlighted that healthcare services are fundamental part of people’s lives, supporting their health and well-being.” Early prevention, can prevent dire and expensive healthcare problems later in life’. Using healthcare screening as an example again, we see that consumers may put off health screening as they are unaware of the full extent of benefits e.g. early detection of diseases will increase chances or recovery and reduce treatment costs. As consumers are not aware and hence will not consider these benefits in their decisions. Hence perceived MPB shaped by incomplete or inaccurate information is lower than MPB benefits of consuming healthcare given full and accurate information. MPB perceived< MPB actual -> lead to suboptimal decision-making and inefficient allocation of resources -> market failure From extract 3, it was also highlighted that there is difficulty ‘in finding physicians and specialists - With a lack of accessible doctor credentials and accomplishments, health consumers cannot easily find a good doctor. Instead, consumers rely on uninformed online reviews that can help with assessing traits like staff friendliness and wait times.” Given that these platforms do not evaluate a physician’s skill level in helping people with their health disorders, there may be misinformation. If the overly exaggerated, MPB perceived > MPB actual -> lead to suboptimal decision-making and inefficient allocation of resources -> market failure.

5 Note: • Given the key word ‘likely’, candidate can suggest relevant sources of market failure not in the extract such as moral hazard or adverse selection due to asymmetric info. Cannot accept inequity concerns as it is not a source of market failure. (ii) A rising share of the US population are enrolled in Medicaid which subsidises healthcare costs for people with low incomes. [Extract 2] Discuss whether government subsidies is the best policy to ensure healthcare are allocated desirably in US. [8] Question Interpretation • Command Word: Discuss whether -> Give a balanced argument before making a judgement • Context: healthcare in US • Concepts: Subsidies (eg. Mediaid) vs other policy measures to correct market failure in healthcare to achieve social optimal point [E g Govt direct provision ; Legislation / Regulation: quarantine, mandatory immunisation laws, Public education: Encouraging residents to do things that benefit their health (e.g., physical activity) or creating conditions to promote good health, and requiring certain actions (e.g., food safety); and Insurance: Medicare] Approach: • Thesis: Explain how indirect subsidies can be adopted to ensure that allocation of resources to healthcare is desirable (both efficiency