2024 ASRJC H3 Prelim Suggested Answers

Suggested Answers for H3 prelim paper CSQ1 (a) Explain, with reference to examples from extracts, compare the characteristics between a quasi-public good and a private good. [6] Examples Rivalrous ( difference) Excludable (similarity) City Parks and park connectors as a quasi-public good When not congested, city parks are deemed to be non rivalrous as when person experience the benefit of brisk walking in the park, it will not diminish another of the same amount of experience. . It is possible to exclude some parts of the park to the public. For example, some areas of the park connectors can be excluded from the public when it is under renovation, construction. Healthcare services as a private good It was mentioned in Extract 3 that doctors “order more tests, procedures and surgeries than necessary” and that this is determinantal to the system at large. Healthcare service is rivalrous as consumption of the service by one patient naturally reduces the quantity or service available for the next patient. For example, if a patient is undergoing a surgery in an operating theatre or is being seen to by a doctor for a medical procedure, then another patient would have to wait and would not be able to avail themselves of that service. This why ordering more tests, procedures and surgeries than necessary is determinantal to the healthcare system at large as it reduces the availability and/or the quality of healthcare service to other patients. Healthcare services are excludable as one needs to pay the bills in order to benefit from the service. Those who can’t afford to pay will be excluded from the healthcare provision/service.

(b) Discuss the extent to which traditional economics is useful in explaining how people decide whether to exercise. [8] Introduction : Traditional Economics – Use Cost and Benefit Analysis / Marginalist principle to decide on whether to exercise. Traditional Economics is useful Limitations of TE. • Benefits of exercising: The monetary value of getting fitter and healthier. Extract 2 states that e xercise is known to significantly improve cardiovascular health, blood pressure, and cholesterol and to reduce the risk of developing diseases such as diabetes and osteoporosis (Myers 2003). As such consumer will incur less medical costs and can pay less insurance premium given good health conditions. Moreover, this will improve the health and productivity which will lead to consumers getting better jobs and attaining higher wages. • Costs of exercising: Explicit costs: cost of gym entrance fee, feeling tired from workout. Implicit costs: opportunity cost of exercise is the next best alternative such as gain knowledge from reading/entertainment from TV ( extract 2). MB>MC If the additional benefits of consuming one more unit of exercise is greater than the additional cost of doing it, a person will decide to exercise till a point MB=MC. MB<MC However, if the additional benefits of consuming one more unit of exercise is lesser than the additional cost of consuming the exercise, a person will decide not to exercise. Illustrate using a diagram: • Difficult to decide calculating MB whether exercise is the main factor to prevent the diseases mentioned . Some people are more prone to developing such diseases while others are less so might not benefit from exercises as much as others. • Difficult to calculating MC • However, in reality, people often display bounded will-power. This term refers to the fact that economic agents often take actions which are against their long-term interest. Bounded will-power is related to problems such as procrastination. • For example, it is likely that some of your peers claimed that they would like to exercise one week from now when you first posed the question to them. However, when you repeat the questions to them one week later, some of them are likely to change their minds and decide not to exercise today. This is time-inconsistent behaviour as they are unable to stick to their plan despite being aware that exercising is important to maintain good long-term health. • With reference to the question above, we can provide a numerical example to enhance your understanding. In standard economic models, it is assumed that individuals discount future benefits (i.e., prefer instant gratification). Assume that the discount rate for future benefit is ½. • Suppose exercise imposes a current cost of 6 utils due to the immediate effort required to do the activity and achieves a delayed benefit of 8 utils due to the health improvements in the future. In our simplified model, let us assume that the discount factor for future benefits and costs is ½. When will you want to exercise? • Exercise today: -6 + ½ [8] = -2 • Exercise tomorrow: ½ [-6] + ½ [8] = +1

• You would like to relax today and exercise tomorrow since the utility you gain from exercising tomorrow is greater than the utility gained from exercising today. • But what happens when tomorrow comes? Will you follow through with your plan? No, you will not. You will procrastinate. You will not follow through without commitment. That is, when tomorrow comes, you will decide to put off exercising again. Extract 2 mentioned ‘form[ing] an exercise habit that would make an individual feel a sense of loss if he or she stops exercising.’ • Loss aversion could also provide a useful alternative approach to analyse decision making under risk such as the decision to exercise. As shown in the loss – gain asymmetry diagram (below: we perceived the value of loss of not exercising which is -$0.05 more than the value of the gain of not exercising which is $0.05. This is likely a case for people who have a habit of exercise such that the endowment effect will kick in, sense of guilt. This endowment effect could bias the outcome of cost benefit analysis taken by the person when deciding whether to continue to exercise even when MC is already more than MB. EV • The extent of the traditional economics on the decision making to exercise or not depends on various factors: • Feasibility - Difficulties to calculate the MC and MB • TE although useful is insufficient to help a person decide on whether to exercise, one should also take into considerations the other factors mentioned above.

c) With reference to Extract 4, explain why the Singapore government intervenes with Medishield in the market for health insurance There are two main reasons why the Singapore government intervenes in the market for health insurance: a) Adverse selection b) Moral hazard [6] Adverse selection in insurance occurs when the people who take insurance are those with the highest risk. For example, an insurance company’s market research states that the average person requires $200 of medical treatment per year. The company then sets its yearly premium at $250, to cover the expected cost of medical treatment as well as $50 for the company to cover the administrative costs of providing insurance and to make a profit. However, it is probable that the people who take out insurance are those most likely to fall sick: those whose families have a history of illness, those in jobs hazardous to health. On average, these people may require $500 of medical treatment. The company would soon make a loss, and would need to raise the premiums. This would price out the majority of people who are of average health and deprive them of a chance of reasonably priced medical insurance. Medishield avoids this problem by ensuring that every Singaporean is include. This allows for risk-pooling and ensures that the insurance takers will not just be dominated by high risk individuals. The average premium can then be lower. This allows Medish