YIJC 2024 JC2 H2 Prelim Essay Q3 Suggested Answer

Health screening is crucial for early disease detection, thereby increasing treatment effectiveness and reducing costs. (a) Explain why the market for health screening might fail in the case of positive externality and where information is imperfect. [10] (b) Discuss whether the most appropriate way to ensure efficient allocation of resources in the market for health screening is to provide it for free. Introduction This essay will explore why the free market for health screening fails in the case of positive externalities and imperfect information. Explain why the market for health screening might fail in the case of positive externality Figure 1: Positive Externalities resulting in Market failure The marginal private benefit (MPB) to a consumer of health screening could be the early detection of critical illness and hence higher probability of recovery, therefore saving on medical expenses, while the marginal private costs (MPC) to the consumer is the associated cost of doing the health screening. In a free market without government intervention, the consumer maximises his/her own welfare by consuming 0Qp amount of vaccination where his/her MPB = MPC. Therefore, the private optimum output for him/her is at 0QP. Quantity of health screening consumed C B A Welfare loss MPB MSB = MPB + MEB MPC = MSC 0 QP QS Benefit / Cost 1st Requirement: positive externalities in consumption – Candidates are expected to explain and illustrate with diagram how positive externalities in consumption leads to underconsumption of health screening. 2nd Requirement: imperfect information – Candidates are expected to explain and illustrate with diagram how imperfect information leads to underconsumption of health screening

Assuming that there are no negative externalities, MPC equals to marginal social costs (MSC). Consumption of health screening however generates positive externalities in consumption (MEB). Health screening can actually help to keep the entire nation healthier and fitter, since any early detection of illness is likely to lead to more successful treatment and recovery, which will result in a more productive workforce. The economy benefits since less man-hours is lost due to workers being ill (e.g. No loss in productivity), the economy also benefits with a larger workforce since workers who remains healthy can also continue to work for a longer period of time before they retire. The presence of MEB causes a divergence between the marginal social benefit (MSB) and MPB, where MSB is higher than MPB. This is illustrated in Figure 3 where the MSB lies above the MPB, with the vertical distance between MPB and MSB representing the MEB At 0QP, MSB > MSC. This means that at output 0QP, society benefits more from consuming an additional unit of health screening than the cost it would incur. Hence, net benefit to society/social welfare can be increased with greater level consumpt