MI H1 ECONS P1 answer

Answer Scheme for Q1 (a) (i) With reference to Figure 1, compare the trend of government expenditure on healthcare with that on national def ence from 2011 to 2017. [2] Government expenditure for both healthcare and de fence have been increasing. [1] Amount spent on defence is always higher than that of healthcare OR Expenditure on healthcare increased faster than expenditure on defence [1] 1m – general trend 1m – refinement (ii) Explain how the trend shown will affect the governm ent’s budget position. [2] Government’s budget is revenue – expd of the gove rnment. [1] ceteris paribus, since G ↑, government’s budget would move towards deficit unless there are lowering of expenditure elsewhere or a ri se in government’s revenue. [1] (b) Explain the need for the Singapore government to provide national defence in Singapore. [4] National defence is a public good which is non-ex cludable and non-rival. Non-excludability means that it is impossible to exclude non-payers from enjoying the protection from national defence. This creates a possibility of free-riding. As such, there will be no willingness to pay for national defence. This causes a lack of effective demand for national defence. Without an effective demand, producers would not produce national defence. [2] Non-rivalry in consumption means that the protection from national defence enjoyed by one consumer does not diminish the protection enjoyed by other consumers. This means that the marginal cost of providing the protection from national defence to another is zero. The government would hence provide the good free so that allocative efficiency is reached at P = MC = 0. [2] 2m – Explanation of how non-excludability of national defence causes non- provision by market 2m – Explanation of how non-rivalry in consumption of national defence causes governments to have to provide the good for free (c) Us ing the concept of opportunity cost , explain one effect on the government arising from the increase in defence expenditure. [2] Opportunity cost is the next best alternative for gone. [1] Increase in healthcare costs will result in an increase in government spending on healthcare and more resources will be channeled there. The opportunity cost of increased spending on healthcare is the benefit to society that could have been generated if the government had spent on the next best alternative developmental area such as education or infrastructure or national defence (either 1) [1] 1m – definition of opportunity cost 1m – explaining opportunity cost incurred from increasing healthcare expenditure

2 (d) Using E xtract 2, explain why the price of healthcare is expected to rise sharply in the free market. [4] • Rise in DD for healthcare due to aging population/ greater awareness [1] • Fall in SS due to shortage of manpower driving up COP [1] • Above two factors causing a shortage and increase in price [1] • Increase in price is sharp due to low PED of healt hcare as healthcare is a necessity / low PES due to low factor mobility (healthcare professionals need specific skills that not everyone possesses; need to be trained) [1] 1m – Explanation of factor that increases demand 1m – Explanation of factor that decreases supply 1m – Explanation of shortage driving up the price 1m – Addressing the price of healthcare rising sharply (e) Assess whether market inefficiency is the main reas on for government intervention in the healthcare industry in Singapore. [8] Introduction Healthcare is an example of a merit good, a good wh ich the government believes that the people will under-consume due to information failure and positive externalities. Thesis: Market inefficiency is the main reason Healthcare services such as flu vaccinations also b enefit friends/ family members in terms of lower expected medical costs in future as they are less likely to fall ill due to the reduced chances of catching the flu from the vaccinated person. This happens w/o compensation. As such MSB > MPB. The market equilibrium output is at 0Qe (MPB=MPC). Meanwhile, the socially optimal level of output is at 0Qs where MS B=MSC. At the market output OQe, MSB is more than MSC, meaning that the society values one more unit of healthcare more than it costs to consu me. There can be an improvement in society's welfare by increasing prod uction and consumption of healthcare services. There is, thus an underconsumption of QeQs units of healthcare services leading a welfare loss of area AEC.

3 8819/MI/PE2/17 Hence there is allocative inefficiency in the marke t where the right amount of the right type good is not produced. OR Individuals underestimate the private benefits of h ealthcare services such as health screening such as the reduction in medica l expenditure due to prevention of chronic illness (Ext 3) as it often c omes about only in the distance future. Thus individuals tend to under-demand health screening at D1, instead of D2 (where the true MPB is). The market equilibrium output is at 0Qe (D 1(imperfect info) = S). Meanwhile, the socially optimal level of output is at 0Qs where D 2(perfect info) = S). As 0Qe < 0Qs, there is an underconsumpt ion of QeQs units of healthcare services leading a welfare loss of area ABE. Hence there is allocative inefficiency in the market where the right amount of the right type good is not produced. Anti-thesis: Market inefficiency is not the main re ason (inequity is the main reason) However, inequity could be the reason instead. Give n that healthcare is a necessity, everyone, including the low-income shoul d have access to healthcare. However, the market would only allocate healthcare to people who are willing and able to pay the market price. T his means that low income households who are not able to pay the marke t price would not receive healthcare. This inequity is made worse by the rising healthcare price. Thus, inequity could be the main reason for the government to intervene in the healthcare market. Conclusion In conclusion, whether market inefficiency is the m ain reason for the government intervention in the healthcare market de pends on which sub market is being considered. For health screening, s ince the government subsidies are not varied according to income, it is likely that the reason for the intervention is not inequity. For primary healt hcare (i.e., healthcare services provided by a general practitioner (GP)), since the subsidies under CHAS are only for lower and middle income families, it is likely that inequity is the main reason. Level Knowledge, skills and application Marks

4 L2 Well-explained market failure analysis; explanat ion of both inefficiency (positive externality/imperfect info) and inequity Thorough explanation of one source of inefficiency, max 5m 4 - 6 L1 Underdeveloped explanation of both inefficiency and inequity Only explained inequity 1 - 3 Evaluative Comment E Explained judgement regarding whether market inefficiency is the main reason for government intervention 1 - 2 (f) Discuss whether the use of a highly subsidized national health screening programme is the best policy that the Sin gapore government should adopt to address healthcare issues. [8] Thesis: A highly subsidized national health screening programme is the best policy to address healthcare issues A highly subsidized national health screening progr amme is preventive healthcare. It is “part of the larger narrative to raise health levels of Singaporeans through early intervention and healthi er lifestyle choices - while keeping costs in check.” It is useful to tackle th e market failure issues of imperfect knowledge, positive externality and equity. A su