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