Discuss the reasons for different approaches mentioned above as solutions to the problems mentioned.

Faced with slowing economic growth and an ageing population, some governments have increased the competitiveness in the healthcare sector to help reduce the price of healthcare services, while others reduce subsidies to ensure that the burden on government funds for healthcare do not escalate.

Discuss the reasons for different approaches mentioned above as solutions to the problems mentioned.  [25]


1.      Effects of “Economic Difficulties”

·       Falling income levels – possibly due to a recession or a slowing in the global economy.

·       Government tax revenue would fall.

2.      Effects of an “Ageing Population”

·       An increase in demand for healthcare services (the squeeze could lead to rising costs).

·       Raises in the load on the government budget on healthcare expenditure.

Market failure is a situation whereby the free market, in the absence of government intervention, fails to allocate resources efficiently, resulting in societal welfare not being maximised. Positive externalities, in existence in the healthcare market, are benefits enjoyed by 3rdparties not directly involved in the production of consumption of a good or service, of which these benefits are unaccounted for in the free market. Imperfect information is a situation whereby one party in the market has a larger access or has superior information in a market as compared to another and can make decisions more rationally.


Healthcare causing market failure

Positive Externalities

1.      Healthcare as a merit good – considered by the government to be socially desirable yet underconsumed/underproduced.

2.      Underconsumption occurs due to presence of positive externalities and imperfect information

·       Positive externalities – individuals will only weigh their MPC (cost of seeking treatment) and MPB (better health, faster recovery) in the consumption of healthcare and ignore a possible MEB (higher productivity in the labour force, less risk of spreading illness/diseases)


Figure 40a: Positive Externalities in the Market for Healthcare Services


Marginal private benefits enjoyed by individuals would be the benefits associated with good health.
Marginal private costs to individuals include the money paid when he or she visits the GP or cost of seeking treatment
Marginal external benefit are positive externalities generated which includes the reduced work disruption as workers do not take sick leave or recover faster; co-workers are also less prone to illnesses – improving the overall productivity of a company. Collectively, this benefit extends throughout society and is immense.

The presence of external benefits means that there is a divergence between marginal social benefit and marginal private benefit.

With reference to figure 40a, which shows the market for healthcare services

  • Free market output would be at Qm where MPC=MPB, since consumers would only consider their own private costs and benefits when choosing to consume and not the external benefits

  • Socially desirable level of output is at Qs where MSC=MSB.

  • Since Qs>Qm, underconsumption of healthcare services occurs and deadweight loss of area ABC is generated

  • Due to allocative inefficiency, market failure exists in the market for healthcare services


Imperfect Information

Figure 40b: Imperfect Information in Market for Healthcare Services



A situation whereby one party in the market has a larger access or has superior information in a market as compared to another and can make decisions more rationally.

Imperfect information arises due to underestimation of benefits of healthcare services, such as prevention of illnesses in the future and a healthier body. With reference to figure 40b, which shows the market for healthcare services

  • Perceived MPB lower than actual MPB due to underestimation of benefits of healthcare services

  • Consumption of goods occurs at Qm based on perceived MPB instead of basing consumption on actual MPB at Qs

  • Underconsumption occurs, as Qm amount of goods is consumed instead of Qs 


Increasing competition within the healthcare sector can come in the following forms

·       Deregulation of healthcare sector èIncrease the number of private firms èIncreased Supply èLower prices making healthcare more affordable èIncrease consumption

·       Increased government provision – building of more government hospitals and medical facilities èDirectly increasing supply and provide a form of competition to the private sector to keep prices competitive

3.      If the government is facing severe debt issues and huge budget deficits, the former should be considered instead of the latter.


The Economic Case for Reducing Subsidies

Increasing the Efficiency of the Healthcare Sector

1.      Subsidies for firms could breed complacency and give firms little incentive or reason to be cutting costs.

2.      Reducing subsidies could serve to encourage greater efficiency in the provision of healthcare.

Overconsumption of Healthcare 

1.      In certain countries with provision of heavy subsidies (resulting in lower prices of healthcare services) or even free healthcare, there could be problems of overconsumption of healthcare.

2.      There could be abuse of the healthcare system (low productivity due to unnecessary sick leave taken), formation of long queues, hospital bed crunch and a shortage of manpower/staffing.

3.      Subsidies on non-essential treatments could be reduced (e.g. aesthetical surgeries), treatments which yield little external benefits.

4.      Reducing subsidies in these cases would increase efficiency.

Improving the Budget Position

1.      Countries could have been experiencing a worsening budget deficit due to increasing government expenditure on healthcare and falling tax revenue.

2.      This reduces the capabilities of the government in implementing essential policies for the economy (e.g. expansionary fiscal policy and supply-side policies).

3.      Reducing subsidies could serve to improve the budget position by reducing government expenditure.



The governments of the world have resorted to different policies to allow for their economies to adapt to the economic difficulties and ageing population. 



Raising the efficiency of the healthcare sector might be the best policy to execute given that the reduction of subsidies may cause for the widening of the MEB as positive externalities form. Reducing healthcare subsidies may cause widespread dissatisfaction amongst the population which may cause political deadlocks in the government.