2026 ASRJC H2 Econs P2 Prelim ANS

1 ASRJC JC2 Preliminary Examination 2024 H2 Economics Paper 2 Suggested Answers and Markers’ Comments Question 1 Market failure can occur due to imperfect information. For example, buyers know more information about their health problems than insurance providers in the healthcare insurance market while consumers of healthcare services may not be fully aware of the benefits of consuming healthcare services. (a) Explain how the market fails due to imperfect information in the market for healthcare services and the market for healthcare insurance. [10] (b) Discuss the policies that the Singapore government could adopt to ensure that the market for healthcare services operates efficiently. [15] Suggested answers (part a) Market failure refers to circumstances in which free, unregulated markets fail to achieve efficient allocation of scarce resources. Distortions in the market, for instance, imperfect information, prevent the price mechanism from allocating resources efficiently. In the real world, there is often a great deal of ignorance and uncertainty due to imperfect information. Imperfect information (and thus information failure) occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially inaccurate choices. Market failure may arise due to lack of awareness of benefits in the market for healthcare services and due to adverse selection in the market for healthcare insurance. R1: Market fails due to lack of awareness of benefits in the market for healthcare services. Consumers who consider healthcare services may underestimate their potential benefits as they may not have complete information about the full longer-term benefits from consuming healthcare services such as they did not realise that they could be productive at work which enables them to earn a higher wage in the future. This is an example of imperfect information, creating a divergence between the consumers’ perceived Marginal Private Benefit (MPBperceived) and the actual Marginal Private Benefit (MPBactual) (Figure 1). MPBperceived represents the amount that consumers are willing and able to pay for each additional unit of healthcare service based on what they perceive to be the benefits they enjoy from its consumption. In this case, it is assumed that there are no positive or negative externalities, i.e. MPBactual = MSB and MPC=MSC. Intro R1: Market fails due to lack of awareness of benefits in the market for healthcare services.

2 MPBActual = MSB MPBPerceived MPC= MSC Benefit, cost ($) Quantity of healthcare services0 Qe Qs E B A Figure 1: Underconsumption due to imperfect information Individuals will consume healthcare service up to Qe, where MPBperceived = MPC but the socially optimal output level is at Qs, where MSB = MSC. Hence, consumers’ imperfect information has led to an under-consumption of healthcare services. If consumers had full information of the private benefits of healthcare services and consume additional QeQs units, society’s welfare would increase because for these units of output, MSB>MSC (the additional benefit to society is greater than its costs). Instead, individuals consume only at Qe. And so there is deadweight loss to society which is indicated by the shaded area ABE (by summing the excess MSB over MSC). Society could be made better off if more resources were allocated to the production of healthcare services. R2: Market fails due to adverse selection in the market for healthcare insurance. Asymmetric information is when the economic agents (e.g. consumers and R2: Market fails due to adverse selection in the market for healthcare insurance.

3 producers) involved in the transaction do not have the same amount of knowledge, resulting in a distortion of incentives and inefficient market outcomes. Buyers of insurance might not divulge sufficient and accurate information about their health conditions to insurance companies. Buyers with higher risks (e.g. high risk individuals could be adopting unhealthy lifestyle) are more likely to buy health insurance with higher levels of coverage. This means that in the long run, insurance companies are likely to incur losses due to higher claims. In response, insurance companies will raise premiums (price of insurance) to cover their losses, but this will deter even more low risk individuals (e.g. low risk individuals who exercise regularly) from purchasing insurance. This will exacerbate the issue as the insurance companies will be left providing insurance to high-risk individuals, which may lead to an increase in losses, and a complete collapse of the insurance market (missing market for health insurance). This leads to a missing market for health insurance for low-risk individuals and an under-allocation of resources to the provision of health insurance. Hence, market failure may arise due to lack of awareness of benefits in the market for healthcare services and due to adverse selection in the market for healthcare insurance. There are two requirements in this question. For each requirement of the question, you will be assessed on your depth of analysis: Depth of analysis Descriptor Analytical An analytical explanation of question requirement with good application of relevant tools of analysis. Cursory An answer that shows cursory understanding of the question requirement and is lacking in AR and AP. Knowledg e An answer that demonstrates weak understanding of the question requirement with many CK errors and possible QA errors. Based on the depth of analysis for both requirements, you will be given a score: Depth of Analysis Mark A+A 10 A+C 8 – 9 A+K 7 C+C 6-7

4 A+0 6 K+C 5-6 C+0 4 K+K 2-4 K+0 1-2

5 Suggested answers (part b) The Singapore government has adopted a range of policies in the attempt to correct market failure resulting from imperfect information. This includes provision of information and regulation such as compulsory vaccination programme. R1: Provision of information The government can provide information to help consumers value the actual benefit of healthcare service. For example, advertising campaigns to promote the importance of health screening help to encourage a healthy lifestyle and increase labour productivity at the workplace which leads to increase in personal incomes. By raising the awareness of the actual benefit of healthcare services, consumers’ perceived benefit of healthcare services is increased, leading to a higher consumption of healthcare services. If the advertising campaign is successful, the divergence between perceived and actual benefit of consuming healthcare services will be removed (i.e., MPBperceived shifted to MPBactual in Figure 2). The socially optimal quantity of healthcare services consumed will then be achieved. Figure 2: Provision of information in the market for healthcare services However, provision of information merely provides market participants with better information but does not artificially distort the workings of the free market. This is favourable, especially from the perspective of the free market. However, the outcome is uncertain. This is because people may not have the willingness to access the information in the first place and even if they do, they may already have a pre-existing mindset on the benefits of healthcare services and the information provided may still not change their views. In addition, it takes time to change people mindset and thus, the desired outcome may not be immediate. Furthermore, the effects of campaigns are not enforceable compared to other policies such as Intro R1: Provision of information

6 regulation or subsidy. However, this may not be a significant issue for Singapore as the population has a basic level of education and is literate to understand/ better appreciate the benefits of healthcare services through campaigns. Thus, the extent of ignor