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A fast ageing population will put pressure on the

governments budget. Health Minister Khaw Boon


Wan said that the key to a sustainable healthcare
system is to minimise market distortions and to
allow healthcare to function as normally as other
economic activities.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Introduction:
Define market failure
Failure of the free market to allocated
limited resources in the production of
goods/services such that societys
welfare is maximized and achieve
social aims such as equity

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
State that there is market failure in the
healthcare sector due to
Presence of positive externalities in the
consumption of healthcare services
Imperfect information of the full private benefits
of consuming healthcare services
Oligopolistic market structure of the healthcare
sector
[Choose at least 2 out of 3 sources of market
failure to develop in Body of answer.]
As a result of significant market failure in the
healthcare sector, government intervention to
correct this market failure is required.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Quantity
0
MPC = MSC
MPB
Y Z
A
C
B
MSB


Costs/Benefits
1
st
Source of Market Failure:
Negative Externalities
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
MPB of consuming healthcare services is
the treatment of individuals illness and
upkeeping of owns health
MEB of consuming healthcare is the spill-
over benefits on 3
rd
parties. For example,
3
rd
parties benefit from an individual
seeking treatment from common flu as it
reduces the spread of sickness to the 3
rd

parties.
Other MEB also includes a healthier
workforce and greater productivity that
benefits the employers as individuals
consume healthcare services.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
MSB = MPB + MEB
MPC of consuming healthcare is the costs
associated in producing healthcare services, like
doctors charges and prescription drugs fees.
MSC = MPC, assuming no negative externalities in
the production of healthcare
Free market level of consumption is at MPC=MPB
where individuals net private benefit is maximized
Allocative efficient level of consumption is at
MSC=MSB where net social benefit is maximized.
Due to under-consumption of YZ units of healthcare,
DWL is incurred. DWL represents the net social
benefits forgone when YZ units of healthcare are
not consumed.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
2
nd
Source of Market Failure:
- Imperfect information of the full
private benefits of consuming
healthcare services
Individuals may underestimate the full
private benefits of certain healthcare
services. For example, individuals tend
to underestimate the private benefits of
annual health screenings, thinking that
they are in good physical condition.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]

DD
2
(with Perfect information)
DD
1
represents demand for healthcare services
when its private benefits are underestimated due
to the lack of perfect information of private
benefits of consuming healthcare. DD
2
represents
demand for healthcare services assuming the
private benefits are fully appreciated by
individuals.
Y is the level of healthcare consumed by
individuals assuming imperfect information
Z is the level of healthcare consumed by
individuals assuming perfect information. This is
also the allocatively efficient level of healthcare
consumption to be consumed by society.
Hence, there is under-consumption of YZ in the
free market resulting in DWL of shaded triangle.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Quantity
0
MPC = MSC
DD1 (with Imperfect information)
Y Z
A
C
B

Costs/Benefits
DD2 (with perfect information)
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Oligopolistic market structure of the
healthcare sector
Healthcare sector could be dominated by a
few large firms due to high entry barriers
High start-up cost due to need for specialized
equipment
Need for specialized labour such as doctors,
nurses
Dominant firms in oligopolistic markets with
significant market power could practice
monopoly pricing where
Qm < Qfm
P > MC, resulting in allocative inefficiency

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
*Note: In the next section of this answer, the
following is required:
Identification of appropriate intervention
methods
Cite Singapore-specific intervention
programme relevant to intervention methods
identified
Explain how the intervention works using
economics framework

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
*Note: In the next section of this answer, the
following is required:
Evaluate strengths/limitations of intervention
methods
In terms of aging population and government
budgetary pressures
In terms of distortion to the free market (in line
with preamble)
In terms of sustainability of intervention (in line
with preamble)
Should government pursue intervention more or
less (to address requirement of question, . the
extent to which the government should
intervene.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
In-depth discussion of the extent to
which the government should
intervene in the healthcare market.
Subsidy
Singapore examples
Class C and B hospital wards in Restructured
hospitals are subsidized
Polyclinic medical services are subsidized
Medifund subsidy is provided to low-income
individuals

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Subsidy
How subsidy works?
An Indirect Subsidy = MEB will bring
consumption to Z, eliminating DWL and
achieving allocative efficient outcome
Subsidies also reduce inequity so that lower
income individuals are more able to consume
healthcare that they need/want.
Strengths
Subsidies do not displace price mechanism.
Market remains responsive to forces of
demand and supply.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Limitations
Difficult to attach monetary value to MEB, that is
a healthier and more productive work force.
If under-estimate MEB, under-consumption of
healthcare persists. Though DWL and extent of
allocative inefficiency is reduced.
If over-estimate MEB, over-consumption of
healthcare will occur. This results in DWL and
allocative inefficiency.
Opportunity cost incurred in providing
healthcare subsidy. Spending on public goods
and other merit goods which improves societys
welfare is forgone.
In view of aging population, subsidy on
healthcare likely to increase. Hence,
sustainability is an issue.

Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Should government provide more/less
healthcare subsidies?
To reduce subsidy expenditure, means-
testing subsidy should be implemented.
Currently, means-testing for
hospitalization subsidy is being practiced.
60% to 80% subsidy is provided for Class
C ward.
More differentiated subsidies for
different income groups should be
considered. Means-tested subsidies
should also be implemented for
polyclinics.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Different levels of subsidies should be
provided for different types of healthcare
services.
Preventative healthcare services which generate
significant MEB such as vaccinations should be
heavily subsidized while curative healthcare
services such as treatment non-infectious
diseases should be subsidized to a lesser extent.
However, subsidies for lower income
individuals should continue to be provided
regardless of type of healthcare consumed as
these subsidies are provided to reduce
inequity
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Evaluative points:
Subsidies cannot form the core of
government intervention policies. In
Singapore, subsidy is one part of a
multi-pronged healthcare intervention
plan which includes
Medisave a compulsory self-financing
healthcare programme, as well as
Medishield a healthcare insurance plan
available to all Singapore citizens.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Direct Provision
Singapore examples
Public hospitals and polyclinics
How direct provision works?
The public hospitals and polyclinics seek to
provide socially optimal level of healthcare
services at affordable prices. Profit-
maximization is not the primary objective.
Strengths
Ensures affordable h/c is made accessible to
all (eg polyclinics are located in
neighborhoods)
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Limitations
As profit maximization is not the primary
objective, provision of healthcare services might
not be at lowest possible cost, resulting in
productive inefficiency.
Given limited supply of doctors, nurses and
medical professionals, public hospitals and
polyclinics may face difficulties in trying to
provide socially optimal level of healthcare
services at affordable prices. Patients may have
to endure long queues, and lower standards of
healthcare services.
It is difficult to determine the socially optimal
level of healthcare services, as this is dependent
of the MEB of consuming healthcare services.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Should the government build more
public hospitals and polyclinics?
Government should not directly provide
all healthcare services as that would
result in significant productive
inefficiency.
At this time, public hospitals provide 80%
of costly hospitalization services while
private hospitals provide 20%. Polyclinics
provide 20% of primary healthcare
services while private clinics provide
80%. This mix of public-private
healthcare providers is beneficial as
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
beneficial as
It provides consumers with choices
Private hospitals and clinics provide quality
benchmark for public hospitals and polyclinics
Public hospitals and polyclinics (charging subsidized
rates) provide pricing benchmark for private
hospitals and polyclinics.

[Note that benchmark does not mean, equal.
For example, it is unrealistic to expect private clinic
quality at polyclinic pricing. Rather, the presence of
polyclinics helps to influence/moderate private clinic
charges, bearing in mind the difference in quality to
be expected.]
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Conclusion & Overall Evaluation:
In view of the aging population, the use of
subsidies as an intervention method should
be targeted and specific.
Subsidies for preventive healthcare that
generates significant positive externalities
should continue while subsidies for healthcare
services that generate little/positive externalities
should be eliminated/reduced.
Subsidies for the lower income groups should
continue for equity reasons. Given growing
income inequality in Singapore, means-tested
subsidies should be the norm so that no
individual requiring healthcare services is denied
access for financial reasons.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Conclusion & Overall Evaluation:
Medisave contributions should be stepped up so
that individuals take up responsibility for financing
their healthcare expenditure as much as possible.
Extensive efforts to persuade individuals to take up
medical insurance should also be made.
Collectively, these measures will significantly ease
the government in providing healthcare for its aging
population.
A mix of public-private healthcare providers is
optimal as it offers choices to consumers and also
allows pricing and quality benchmarks to be set.
This will contribute towards a healthcare sector that
can provide quality healthcare at reasonable prices.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Examiners Comments:
Quite a number of students also lumped the analysis
of market failure due to imperfect information and
positive externalities.
Quite a number of candidates fail to define terms such
as MPB and MEB clearly. In particular, examples given
to explain positive externality are often not clear! One
common example includes external benefit of h/c
involves a more productive society. Candidates should
avoid being so vague about the 3
rd
parties by harping
on society. It is essential that they identify the 3
rd

parties clearly- i.e. employers that benefit from
greater productivity of his firm from an individuals
consumption of h/c.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
For the 2
nd
part of this question,
candidates should expound on the
measures to deal with the market
failure above, and provide analysis
and deep evaluation. To obtain the
highest mark range, candidates should
evaluate with respect to the Singapore
context presented in the preamble -
consider issues related to population
ageing, budget pressure and
sustainability of the Singapores h/c
system.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
For instance, in evaluating subsidy, one common
point of evaluation would be that imposition of
subsidy exerts a great strain on governments
budget. Better scripts would go on to comment on
the sustainability of this measure. With ageing
population, government expend on subsidy is
expected to rise; government might resort to raising
tax rates. With the workforce growing less than
proportionately (or falling) with respect to the
proportion of aged, candidates should note the
difficulty in raising sufficient income tax revenue.
Students need to specify whether the subsidy is
given to the producer or consumer. This must be
clearly stated because the effects on the graph are
different for both cases.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Students are to note that Medisave and
Medishield are not examples of h/c subsidies.
Medisave account is part of an individuals CPF
account, which comprise of compulsory savings.
Hospitalization charges can be partly paid
through the patients Medisave account.
Medishield is a medical insurance scheme that
is tied to the Medisave account. The premiums
for Medishield can be financed through the
Medisave account. The purpose of Medisave
and Medishield is to make sure that the
majority of Singapore citizens are able to back
their need/want for healthcare with the ability
to pay.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
For education and campaign,
examples should be provided. Again,
evaluation on this lacked depth of
thought for many scripts. Better
evaluation discussed the possibility of
a better-informed public who would
gain from better health, and thus
contribute to the long-run benefits of
reducing the strain on governments
budget to finance their health needs,
resulting in a more sustainable h/c
system in view of population ageing.
Evaluate the extent to which the government
should intervene in the market for healthcare in
Singapore. [25]
Candidates should discuss direct provision as a
possible measure in order to gain a holistic
discussion. They should provide examples
(government hospitals, polyclinics) and discuss the
case for more or less direct provision from the
current level. The best scripts examined this part by
comparing with the case for promoting greater
competition (i.e. privatization, deregulation). These
responses showed good awareness of the lack of
profit motive of public hospitals and the tendency to
become productive inefficiency which might result
in possibly higher government expenditure to run
them. Concurrently, allowing more private providers
might spur greater productive efficiency and higher
quality of services in a bid to compete for more
profits.

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