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H1 Economics - Lecture
Term 2 Week 7
Market Failure Essays
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Paragraph Writing Skills
PEEL THE ISSUE. PEEL PEEL PEEL!
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P E E L
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Analyse why the government should intervene
in the market for healthcare [12]
In Planning: Identify..
Direction word: Analyse Analyse why
Why: Give reasons
Determine point of view/perspective:
Government
Context: Healthcare Market
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Analyse why the government should intervene
in the market for healthcare [12]
Issues to think about
If the government is required to intervene
there has to be an issue or problem.
What is that problem?
Identify why market fails with respect tohealthcare: Therefore, determine source of
market failure
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Analyse why the government should intervene
in the market for healthcare [12]
Issues to think about
So what if market fails?
What is the significance for resource
allocation with respect to the healthcare
market
Is the a socially optimal efficient allocation of
resources
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Analyse why the government should intervene
in the market for healthcare [12]
Sequence involved in answer
Identify Market/product: Healthcare
Identify agent/party: Consumer/producer
Identify activity: consumption/production
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Analyse why the government should intervene
in the market for healthcare [12]
Sequence involved in answer -
It helps to begin analysis with scenario
involving no spill over
Describe MPC and MPB with respect to
healthcare market
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Analyse why the government should intervene
in the market for healthcare [12]
In a free market equilibrium, the equilibrium
is where Marginal Private Benefit (MPB) =
Marginal Private Cost (MPC) with outputequals to Qe units.
Assuming no negative externalities, MPC is
equal to Marginal Social Cost (MSC).
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Qty of Healthcare services
consumed/produced
MPC
MPB
Pe
Qe
How do Externalities lead to market failure?
Cost/Benefit No Externalities
MEC = 0
MEB = 0
= MSC
= MSB
MSB = MSC (max society welfare)
What if externalities exist?
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Analyse why the government should intervene
in the market for healthcare [12]
Sequence involved in answer -
Establish possible third party/spillover effects
of activity. In this case due to a positive impact on third
parties a positive externality (define) is
generated. Therefore, a separate MSB exists suggesting a
deviation between MPB and MSB
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Analyse why the government should intervene
in the market for healthcare [12]
Sequence involved in answer -
Positive externalities associated with the
consumption of healthcare: E.g. - when youare vaccinated against whooping cough youare not the only person to benefit.
Other people also gain because they are nowprotected against catching whooping coughfrom you. This extra or externality benefit ismissed by the free market.
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Analyse why the government should intervene
in the market for healthcare [12]
Sequence involved in answer -
Third parties, close to these healthy
individuals, therefore, also benefit becausethe chances of getting sick is reduced and as
such, productivity as a whole can be
increased, which is the external benefitresulting from the consumption of healthcare.
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Analyse why the government should intervene
in the market for healthcare [12]
Diagram: Illustrate/explain how the output
that maximises net private gain deviates from
the socially desirable level of output.
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Analyse why the government should intervene
in the market for healthcare [12]
The existence of positive externality creates a
divergence between the MPB and marginal social
benefit (MSB) curves as shown in the diagram.
This divergence shows the amount of marginal
external benefit (MEB) at each output level.
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Positive externalities . society accrue external benefits .
Qty of Healthcare
services consumed
MPC
MPB
Qe
Cost/Benefit
Less likely to get ill
Improved productivity
MEB
MEB
MEBMSB
How does Positive Externalities (consumption) lead to market failure?
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Analyse why the government should intervene
in the market for healthcare [12]
Positive externalities lead to under consumption.
Allocative efficiency is not achieved as societys
welfare can be increased without making anotherindividual worse off through the reallocation of
resources
Government intervention would be required
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Positive externalities . society accrue external benefits .
Qty of Healthcare services
consumed
MPC
MPB
Qe
Cost/Benefit
MEB
MSB
MEC = 0= MSC
Qpe
MSB = MSC
Socially optimal
output
Market
output
Deadweight loss
How does Positive Externalities (consumption) lead to market failure?
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Analyse why the government should intervene
in the market for healthcare [12]
Therefore given that:
Positive externalities lead to under consumptionand
Allocative efficiency is not achieved as societyswelfare can be increased without making anotherindividual worse off through the reallocation of
resources resulting in a deadweight loss untosociety
Government intervention would therefore berequired
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)
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
What are direction words? Discuss
Question asks DiscusswhetherYes? No?
Also are interventions sufficient?
Rationale for intervention provided in part (a)
Answer requires assessment of current
interventions (effectiveness)
b) h h h
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Restate need for intervention: Positive externalitiesleading to under consumption
Identify measures adopted by the Singaporegovernment in its intervention in the healthcaremarket.
- subsidies/transfer payments
- direct provision- Legislation
- moral suasion
b) i h h h i i i
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Subsidies
Usually targets producers: The government can
attain the socially efficient level of productionthrough providing subsidies to health-care providers
E.g. reducing the training cost of doctors and other
medical professional to increase the level ofhealthcare services) and government provision for
health checks.
H1 Economics Market Failure Part 3: Government Intervention
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H1 Economics Market Failure Part 3: Government Intervention
Qty of healthcare services
produced
MPC
MPB
Qe
Cost/Benefit
MEB
MSB
= MSC
Qe
Socially
optimal
output
Market
output
How do Positive Externalities lead to market failure?
Subsidies
MPC+Subsidies
Subsidies
b) Di h h h i i i
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Subsidies
This measure rewards first parties for bringing
benefits to third parties
More production can take place, leading to a more
efficient level of resource allocation
b) Di h th th t i t ti i
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Transfer payments
- Targets Consumers: Government can address theissue of under-consumption by providing transferpayments to consumers.
- The government can intervene to encourageconsumption of preventive healthcare by offering
cash grants per unit amounting to the marginalexternal benefit (MEB). This cash grant must bespent on health checks only
b) Di h th th t i t ti i
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Transfer payments
- Eg. a one-time grant to citizens Medisave account or
a Medisave top-up where citizens can only spend the
money on healthcare. This will shift demand for
healthcare to the right.
- This shifts the MPB curve up to where the MSB is.
- This method increases consumption of healthcare and
moves equilibrium quantity of healthcare consumed
towards the social equilibrium level of consumption.
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b) Di h th th t i t ti i
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Effectiveness of subsidies and TPs :
Whether net economic welfare of society can be
improved or maximised depends on the accuracy ofestimating the MEB thus determining the exact
amount of cash grant per unit to be given.
Too much may result in overconsumption/production
b) Disc ss hether the c rrent inter entions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Effectiveness of subsidies and TPs :
If the amount ofMEB is over-estimated, it will lead
to over-consumption and substantial wastages ofresources, which can result in an even greater
welfare loss than without government intervention.
Moreover, taxes have to be imposed to financesubsidies.
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Effectiveness of subsidies and TPs :
Last but not least, the opportunity costs for
providing subsidies/transfer payment needs to beconsidered too as these funds can be channelled to
other purposes.
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H1 Economics Market Failure Part 3: Government Intervention
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Qty of Healthcare services
consumed
MPC
MPB
Qe
Cost/Benefit
MEB
MSB
= MSC
Qe
Socially
optimal
output
Market
output
How does Positive Externalities (consumption) lead to market failure?
Government Provision
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Direct Provision
Government provides healthcare: limitations
overconsumption and long queues may arise ifhealthcare services are provided for free.
However, this is not the case in Singapore because
the financing philosophy of Singapore's healthcare
delivery system is based on individual responsibility
and community support
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Direct Provision
Also bureaucracies in the government sector and the
lack of profit incentive when government directly
provide for healthcare may lead to under-investment
or reduction in efficiency and quality.
However, this is also largely taken care of as Ministry
of Health (MOH) establishes a budget for each
hospital to ensure that hospitals operate as
efficiently as possible.
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Legislation
Government has intervened in healthcare is through
legislation.
compulsory for Singaporeans earning an income tocontribute to their own Medisave accounts to meet
their personal or their dependants' hospitalization
expenses, especially after retirement.
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Legislation
Government has intervened in healthcare is through
legislation.
- Compulsory vaccinations - it is also compulsory in
Singapore to undergo certain immunization
during childhood e.g. diphtheria and measles.
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b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Education/moral suasion
- These include anti-smoking campaigns,introduction of the National Healthy Lifestyle
Programme, creating awareness for AIDS and
encouraging women to have regular check-up's for
breast cancer.
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Qty of Healthcare
services consumed
MPC
MPB
Qe
Cost/Benefit
MEB
MSB
= MSC
Qe
Socially
optimal
output
Market
output
How does Positive Externalities (consumption) lead to market failure?
Legislation/Education
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Education/moral suasion
- Since the introduction of these programmes, HPB
has instilled in Singaporeans the importance of a
healthy lifestyle, maintaining healthy body weight
and equipping Singaporeans with the knowledge and
skills to practice healthy lifestyle.
- However, the imposition of these programmes is along term solution and these programmes require
funding too.
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Conclusion
- Due to the intense dependence on human resources
for economics growth in Singapore; polices are
designed to address the significant positiveexternalities that exist in the healthcare market
- Despite the limitations of individual policies as
discussed, the Singapore governments use of a mixof policies which have helped to tackle the various
aspects of market failure to a large extent.
b) Discuss whether the current interventions in
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b) Discuss whether the current interventions in
the market for healthcare by the Singapore
government are sufficient. [13]
Conclusion
- As a result, these government interventions are
largely sufficient at this moment in time to cater tothe needs of Singaporeans.
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