ACJC_H2_ECONS_P2_essay_Q3_(info_failure)

1 Suggested Answers for 2018 Econs H2 Prelims Paper 2 Essay Question 3: 3(a) Explain how imperfect and asymmetric information can lead to market failure in the markets for healthcare services and healthcare insurance. [10] (b) Discuss whether joint provision is the most appropriate policy to correct the market failure in Singapore’s healthcare services. [15] Suggested approach to 3(a) 3(a) Explain how imperfect and asymmetric information can lead to market failure in the markets for healthcare services and healthcare insurance. [10] Question Requirement: • Explain how imperfect information exists in 1) healthcare services market and asymmetric information in the 2) healthcare insurance market • Explain how the sources can lead to market failures. • Use of diagram(s) should help in explanation but not compulsory. Introduction: Market failure exists when resources are not allocated efficiently, therefore leading to welfare loss in the society. Imperfect information exists when the economic agents do not have perfect information about the product/service. Asymmetric information is when one party has more information than the other. There is imperfect information in the market for healthcare services and asymmetric information in the market for healthcare insurance. Therefore, without any form of government intervention, both markets fail. Point 1: Imperfect information leads to under-consumption of healthcare services. Economic agents may have under-estimated the true private benefits for themselves in the consumption of healthca re services, such as vaccinations, doctor consultations. For example, they may not see the doctor when they are sick if they under- estimate the seriousness of their illness. As a result, the virus may spread to other healthy people close to the patient. In other times, the sick person may also over-estimated the costs of consuming the healthcare services, thereby refusing treatments and/or consultations. As rational economic agents, they will only consume healthcare services up to a point when their perceived marginal private benefit is equal to their marginal private cost. However, due to imperfect information, the true private benefits of the consumption of healthcare services is higher than the estimated marginal private benefit, there will be an under-consumption of healthcare services, leading to market failure.

2 As seen from the diagram above, the so cially optimal level of consumption of healthcare services should be where the marginal private benefits (actual) equal to the marginal private cost, Qs. However, because of imperfect information, the market level of consumption is only at Qm, where the marg inal private benefit (perceived) equals to the marginal private cost. As Qm is lower than Qs, there is under-consumption of healthcare services, therefore the market for