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 consumption of health screening. The socially optimum level of output, 0Qs, occurs where MSC = MSB. Hence, when left to the market forces, there is under-consumption of health screening by QPQs amount. By summing the excess of MSB over MSC for the units QPQS, we arrive at a monetary measure of welfare loss (also known as deadweight loss) of area ABC to the society. As a result, the underconsumption of health screening leads to market failure. Explain why the market for health screening might fail in the case where information is imperfect The perceived marginal private benefit (MPBperceived) of a consumer in getting health screening is the knowledge of his/her health status while his/her marginal private costs are the associated cost in getting the health screening. In a free market, without government intervention, the consumer maximises his/her welfare by consuming the amount of health screening 0Qp where his/her perceived marginal private Figure 2: Market failure due to imperfect information

benefit (MPBperceived) = marginal private costs (MPC). His/her perceived private optimal output is therefore 0Qp. The consumers are not fully aware of the benefits (to themselves) of regular health screenings, which is the early detection of potentially chronic diseases such as cancer and cost savings from avoiding treatment of the illness for the long term (early treatment is more effective). In actual fact, most individuals only get screened when serious symptoms are present. Due to the imperfect information, consumers under-estimate their actual marginal private benefit (MPBactual) of going for medical screenings, resulting in a perceived marginal private benefit (MPBperceived) that is lower than MPBactual as seen in Fig 11. Therefore his/her perceived private optimal output is at 0Qp, where MPBperceived = MPC. But because the benefits of early medical screening is undervalued, their actual marginal private benefit (MPBactual) is higher than their perceived marginal private benefit (MPBperceived). This means that with perfect information, private optimum consumption will be at 0Qa. As a result, with the information being imperfect, the consumer has underconsumed health screenings. The quantity of medical screening consumed by the consumer is sub-optimal and does not maximises his/her welfare, leading to market failure. Level Knowledge, Application/Understanding and Analysis Marks L3 Analysis & Application For an analytical answer that addresses the question thoroughly with clear explanation well supported by tools of analysis , such as market failure analysis and diagram. There’s clear and thorough explanation of how positive externalities in consumption and imperfect information leads to market failure in the health screening market. There is good ability to organise ideas or discriminate between relevant and irrelevant factors. Answer is well-focused on question , (e.g., the health screening market) with the good use of economic concepts, theories or principles. Knowledge & Understanding For an answer that demonstrates an accurate knowledge and understanding of economic concepts, theories related to question, e.g., market failure analysis. 8 – 10 [A+A: 10] [A+C: 8-9 L2 Analysis & Application For an under-developed answer that attempts to address the question and explain how positive externalities in consumption and imperfect information leads to market failure in the health screening market . Answers may be descriptive, lack an analytical approach (e.g., not supported with tools of 5 – 7 [A+K: 7] [C+C: 6-7] [A+0: 6]

analysis, incomplete use of graph) or is incompletely explained with gaps in analysis. [Or For a one-sided analytical answer that address only one of the two question requirements, i.e., explanation of one source of market failure only] For an answer that is supported with some application to the context of the question (e.g., the SSBs market ). There is limited ability to organise ideas or discriminate between relevant and irrelevant materials. Answer has some relevance to the question context but is generic (e.g., pre-learnt answer that is not focused on addressing the question specifically). Knowledge & Understanding For an answer that demonstrates largely accurate knowledge and understanding of economic concepts, theories related to question, e.g., market failure analysis (i.e., no major conceptual errors). [K+C: 5-6] L1 Knowledge & Understanding For an answer that shows limited knowledge and understanding of relevant economic concepts and theories (e.g., basic description or definitions). Few valid points made which are scant and inadequately explained. Answers are mostly irrelevant and inaccurate. Answer demonstrates that the meaning of question is not properly grasped or may contain basic errors of theory. 1 – 4 [C+0: 4] [K+K: 2-4] [K+0: 1-2] Markers’ Comments In general, students