2013 Promo Exam Revision Package H1 Economics Case Study Question 2

Case Study Question 2 Answer Model:

a(i) With reference to Figure 1, compare the trend of health and overall Consumer Price
Index of Singapore between 1990 and 2002.


[2]
- Both overall and health CPI experienced an increasing trend over the period. (1m)
- Health CPI rose faster than the overall CPI over the stipulated period. (1m)
- Between 1990 and 2002 the health CPI rose more than twice that of the overall CPI
(1m)


a(ii) What evidence is contained in the data to suggest that the trend observed in health
care cost in Singapore is due to demand side factors?

[6]

Explain any 2 demand factors
- Healthcare is a normal good. The increase availability of medisave to pay for health
care expenses has contributed to increase in the demand for health care and hence
the price of health care services as shown in figure 1
-












- Furthermore, since part of the Medisave savings can be used to buy Medishield (an
insurance plan), more people are covered by medical insurance. If these people are
diagnosed with serious illnesses, they are likely to demand for more treatments than if
they are not insured. This will result in an increase in the demand for health care and
hence the price of healthcare services.

- Rising life expectancy and the growing proportion of aged population as shown in table
1 have also resulted in the increase in demand for health care and hence the price of
healthcare services. The elderly are likely to encounter more frequent and more
prolong spells of illness. Furthermore, health care expenditure for this group is
extraordinarily high in their last year of their life.

- Availability of more information of health care services on govt websites has also
contributed to the increase in the demand for health care and price of health
care services.

Evaluation
Either
- The increase in the price of health care has been moderated by increase in the
supply of health care services According to extract 1 improvement in efficiency or
competition among health care providers may resulted in lower unit cost.

Or
- The price of health care services is determined by both demand and supply

D1
S1
E1
Q1 Q2
Price
Quantity
P2
P1
D2
E2
Figure 1
2013 Promo Exam Revision Package H1 Economics Case Study Question 2


factors. Besides demand factors, supply factors may also have responsible for
changing health care cost. The extract hints at how the supply of health care may
have increased due to increase efficiency or competition among health care
providers, causing heath care cost to fall. Or The supply of health care services
may have fallen due to more expensive health care treatments, resulting in rise
in health care cost. However, there is insufficient data to show that supply has a
considerable effect.

Mark Scheme
- Explain clearly one factor based on evidence, either table or data (max 3m)
- Explain clearly 2 factors based on evidence, either table or data (max 4m)
- Evaluation (2m)

a(iii) Suggest and explain one economic implication of rising health care cost for the
Singapore government.

[2]
















- One third of total health care expenditure is financed by the Singapore
government.[1]
- Rising health care cost may require government to increase its expenditure on
health care.[1]
- This means government may have to increase its tax rates to fund the increase in
health care expenditure [1m]. Or Alternatively, the government may have to
channel part of its funds from other uses such as expenditure on education or
infrastructure development towards financing the increase health expenditure.[1m]

Mark Scheme
- Assertion [1]
- Cite data [1]
- Explain implication [1]

2013 Promo Exam Revision Package H1 Economics Case Study Question 2


b Explain what is meant by the statement that health care is a marketable
commodity which can be rationed through forces of supply and demand.
(Extract 2 line 1-2)

Introduction
- The term marketable commodity refers to a private good.
- A private good exhibits the properties of rivalry and excludability.
- Rivalry means consumption by one person reduces the quantity available for others.
For e.g., when Peter uses the services of a doctor, the doctor cannot be attending to
John. Both Peter and John compete for the doctors services, they are rivals for the
services of the doctor that is the amount of a doctors time is scarce. Doctors services
are priced according to the relative market demand and the supply of the doctors.
- Excludability means anyone who does not pay for the good or service is excluded
from enjoying its benefits. For e.g., if you dont pay for services of the doctor you
will not be able to benefit from services of the doctor.
- Since health care services are rivalrous, the MC is positive. Since health care is
excludable, there will be demand for it. The interaction of the demand for and
supply of health care service will determine the market equilibrium price and
output of health care .
- The good is rationed or distributed based on the ability and willingness to pay
for the good. Those who are willing to pay will get the good while those who
cant will not get the good.
- While health care can be provided by the market, it would likely to be under
consumed because the health care market is subject to various forms of market
failure.


[6]















Mark Scheme
- Mention the heathcare is a private good[1]
- Define the two properties of a private good [1+1]
- Explain each property in the context of healthcare [1+1]
- Explain that the good is provided by the market [1]
- Mention how the good is rationed [1]
- Mention that healthcare is underconsumed if left to the free market [1]

Max 5m

L3 Able to explain the 2 properties of a private good in the context of
health care and how it can provided by the market
5-6
L2 An underdeveloped explanation of the 2 properties of a private good. 3-4
L1 Make some comments that health care can be provided in the market. 1-2



c (i) The health care market is regarded as being subject to many forms of market
failure. (Extract 2 line 3-4). Explain how positive externality in consumption caused
market failure in the health care market.


[6]

2013 Promo Exam Revision Package H1 Economics Case Study Question 2




Explain the term positive externality.
Positive externality refers to the benefit (1m) that arises from production or consumption
experienced by third parties in the market for which no compensation is paid. (1m).

Explain with an example, how positive externalities arise in health care.
Identify an example of healthcare service: Healthcare services such as flu vaccinations,
generates external benefits in consumption. (1) The vaccination not only has private benefits
i.e. the person has a flu vaccination is less likely to catch the flu and hence incurs lower
medical cost, but it also has benefits to third parties who are people not involved in the
consumption or production of the flu vaccinations.
Identify the 3rd Party: In this case, the third parties are friends, family, employers and work
colleagues of the individual who also benefit even though they did not consume the flu
vaccination. This is noted in Extract 3, Point 3. (1m)
Explain the external benefit : The positive externalities that arise from healthcare such as flu
vaccinations can impact these 3rd parties by reducing their chances of catching the flu from
the vaccinated person. (1) This will thus benefit them in terms of lower expected medical
costs in future as they are less likely to fall ill for which they do not pay. (1)
Evidence required for this question
Comments: A diagram is not required. More important to demonstrate ability to use an
example to clearly identify who is the 3rd party, what is the benefit they receive, the link
between the benefit and the 3rd party, and lastly in the context of an example such as
vaccinations. Evidence will also be required.
Mark Scheme
- Response to signpost [1m]
- Explain with example [1m] how positive externalities or in consumption lead to
underconsumption [3m]
- Diagram with explanation [1m]
L3 Able to explain clearly 1 reason with the use of diagram why
consumers may under consumed health care services
5-6
L2 An underdeveloped reason why consumers may under consumed
health care services
3-4
L1 Make some comments why health care may be underconsumed 1-2





































c(ii) Discuss whether the policy currently adopted by the UK government in the provision
of health care is appropriate.


[8]
















Introduction: What it is? Cite data (1m) : As mentioned in extract 2, in UK the health care service is
provided to a large extent by the UK govt. at zero market price., and it is financed by taxation.

Thesis: Direct provision is appropriate:
Reduce inefficiency
- It will solve the problem of inefficiency by increasing consumption and production to a socially efficient level .
Reduce inequity
- The U.K government adopts state provision of basic health care and this would reduce the inequity problem as the
poor or needy would have access to it.
Govt. may consider this policy as appropriate.
because health care generates extensive external benefits and there is serious information failure on part of
citizens.
Development
2013 Promo Exam Revision Package H1 Economics Case Study Question 2




















































L3 Using evidences provided, explain and evaluate clearly the current policy adopted by the
U.K government in health care provision.
7-8
L2 Using evidences provided, explain the current policy adopted and some attempt at
evaluation of current policy adopted by the U.K government in health care provision.
4-6
L1 Make some comments on current and new policy. 1-3
Conclusion: [2m]
It would , however, be difficult for U.K to replicate Singapores health care system because the health care system
currently adopted are radically different and it would take time to cut back expenditure on health care. The government
might also lose political support in the process of doing so.


Anti-thesis:
The direct provision has its limitations. Cite data.
Evaluate:
Over consumption
- When public hospitals in UK provide heath care at zero market price it encourages over consumption. This
conclusion is supported by the evidences in extract 2 where there is excess demand resulting in some
patients going untreated, some join waiting list, some going private and the use arbitrary priority to treat
urgent cases.
Requires high tax revenue
- The zero market price implies that the government has to impose high tax rates to finance health care expenditure.
This could lead to disincentive to work, savings and investments which would in turn affect the future growth of the
economy
Blunt tool
- State provision is a blunt instrument because it does not distinguish those who can afford and those who
cannot afford. Thus the objective of a redistribution of income from the rich to the poor might not be achieved.
- Economic growth through greater incentive to work, savings and investment.



Continuation of anti-thesis
Suggest one new policy that UK could implement to ensure efficient allocation of resources
Privatization of health care:
Provision
- UK could privatize the health care service The entry of private providers into the health care market of UK will
promote greater efficiency through competition. It will likely to result in lower prices, better services, more
choices and shorter waiting lines as evident in the Singapore case.
Financing: co payment
- Introduce compulsory savings scheme such as the Medisave scheme used in Singapore. This will make the British
residents more cost consciousness and this would reduce demand to a level closer to the socially ideal
output. Such a scheme will reduce govt. expenditure. This means that govt. can lower the tax rates in the country.
This will have positive effects on long-term economic growth through greater incentive to work, savings and
investment
Govt. reposition as regulator
- The UK govt should reduces its role in the provision of health care services, its should position itself as a
regulator of healthcare services in the country. For e.g., it could provide information on the price and quality of
services of the different healthcare providers so that consumers can make more informed choices. It should
also ensures that no one should be deprived of healthcare on financial grounds.





2013 Promo Exam Revision Package H1 Economics Case Study Question 2