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CLASSIFICATION OF MICROECONOMIC POLICIES 1: E.G.

SPECIFIC TYPES OF BASIC HEALTHCARE SERVICES

POLICIES TO INCREASE THE PRODUCTION/CONSUMPTION OF MERIT GOODS


1. GOODS THAT ARE GOOD FOR CONSUMERS BUT CONSUMERS UNDERVALUE THEM DUE TO IMPERFECT INFORMATION REGARDING PRIVATE BENEFITS
2. GOOD FOR THE REST OF SOCIETY BUT DUE TO THE PURSUIT OF SELF-INTERESTS, POSITIVE CONSUMPTION EXTERNALITIES ARE DISREGARDED
3. CONSUMERS CANNOT AFFORD THEM DUE TO INABILITY TO PAY (EXCESSIVE INCOME INEQUALITY)
[examples are based on the healthcare market in Singapore please provide specific examples of healthcare services that justify government intervention]
MARKET-ORIENTED POLICIES DIRECT PROVISION RULES AND REGULATION POLICIES TO INFLUENCE DEMAND
(COMMAND AND CONTROL):
Government as the Private sector supplies the good but government sets rules to regulate the behavior Policies to regulate Policies to influence
supplier of the good of the private firms. Penalties are imposed on the private firm who is found to have consumers behavior information flow
violated the rules.
Policies to regulate supply or producers behavior in terms of:
Indirect subsidies Direct subsidies Direct provision Production level Level of quality Price controls Price regulation Campaigns /
Education
Explanation of Indirect subsidies E.g. Medifund targeted E.g. Build public E.g. Issue more E.g. Only doctors who E.g. price ceiling E.g. MC pricing, E.g. Campaigns increase
how each policy reduce COP shift subsidies to the poor hospitals, polyclinics, licenses for private graduated from AC pricing Medisave (compulsory information more
works supply curve to the which can be used to hire staff to run the hospitals or private selected reputable savings in the CPF set awareness but
right (or shift the MPC pay for certain medical hospitals and polyclinics clinics to operate in overseas universities aside for designated awareness is not
curve downwards) treatments the healthcare sector are recognized and healthcare services sufficient, it must be
price falls increase Direct provision in Singapore can be hired by increase demand because accompanied by a
ability to buy Direct subsidies increase supply directly increase market hospitals or can increases ability to pay change in mindset
increase Qd increase ability to pay for achieve AE & supply of hospitals in practice in Singapore achieve AE increase demand
achieve AE & the good increase affordability (Diagram) Singapore maintain a achieve AE
affordability demand achieve AE E.g. A more relaxed minimum standard of Medishield Life (Diagram)
(Diagram) (Amend labels in lecture quota on the number service in the private (medical insurance
notes for diagram 15 on of students admitted healthcare hospitals scheme) co-payment
page 30) into Medical School in between consumer and
Singapore increase Heavy penalties are insurance company
in the supply of imposed on those who increase demand
doctors in Singapore flout the rules achieve AE

Heavy penalties are


imposed on those who
flout the rules

1. Effectiveness Effective in reducing Increases affordability Most effective in Effective in reducing Effective in ensuring Medisave increases Campaigns increases
in reducing prices but not but does not ensure reducing prices (full prices but not in minimum quality but demand, hence increases demand, hence increases
prices and effective in ensuring minimum quality subsidy when good is ensuring quality not in reducing prices price and not effective in price and not effective in
ensuring minimum quality provided by the ensuring minimum quality ensuring minimum quality
minimum quality government free of
charge) and ensuring
minimum quality
2.Wastage of If source is due to If source is due to Imperfect information: Imperfect Imperfect Less wastage : Less wastage : After
resources externality, imperfect information: Hard to estimate what information: information: What is Consumers are made information is provided,
imperfect info: Difficulty in estimating is the socially optimal Hard to estimate the yardstick to responsible for ensuring consumers have the
Difficulty in the correct amount of output level Build too what is the socially measure minimum the well-being of their responsibility for
estimating the MEB e.g. many hospitals, hire too optimal output level quality own health and own ensuring the well-being
correct amount of Overestimate MEB many doctors and How many licenses health expenditure. of their own health and
MEB e.g. too much subsidies --> nurses to issue? What is the Elaborate own health expenditure.
Overestimate MEB Overproduction and overproduction and optimal number of Elaborate
too much subsidies -- overconsumption overconsumption licenses to issue?
> Overproduction and
overconsumption
3. Address root Not effective Not effective Not effective Not effective Not effective Not effective Effective
cause imperfect
info
4. Time lag With subsidies, results With subsidies, results Very long time lag. Relatively short time Relatively short time Some time lag with Very long time lag as
can be felt more can be felt more Takes time to build lag lag medisave as consumers mindsets are hard to
immediately immediately hospitals and train need time to save up; change
doctors and nurses
5. Feasibility Feasible only if the So far citizens cooperative Feasible only if the
government has funds and trust the government, government has funds
hence relatively feasible

6. Desirability Require funding. Require funding. Heavy Heavy burden on the Does not require Does not require Medisave: Individuals own
Heavy burden on the burden on the govt and taxpayers. Not funding. In fact, funding. In fact, savings are used
government. May not government. May not be sustainable in the long private firms may private firms may Co-payment policy
be sustainable in the sustainable in the long run. Taxes not popular have to pay to obtain have to pay to obtain government pays part of
long run unless run unless taxation but and may affect incentive the license. Funds can the license. Funds can the hospital bill and
taxation but taxes not taxes not popular and to work be collected by the be collected by the consumer pays the other
popular and may may affect incentive to government if they government if they part Encourages self-
affect incentive to work adversely which in Crowding out private catch any private firm catch any private firm reliance and Singaporeans
work adversely which turn affects economic sector activity - Public flouting the rule flouting the rule to be responsible for their
in turn affects growth and in turn ability hospitals compete with healthcare the
economic growth and to collect taxes private hospitals for government can thus spend
in turn ability to collect doctors, nurses, land comparatively less on
taxes and so on healthcare services (Table
, 1: total healthcare spending
Less incentive to as a % of GDP is only
innovate in provision of 3.3%) Less burden on
public healthcare the government
services due to absence
of profit motive;
organizational lag
greater inefficiency

7. Admin and
enforcement
costs

8. Degree of With indirect With direct provision Greater certainty Greater certainty Relatively uncertain Least certain depends
certainty in subsidies, less there is more certainty depends on consumers on consumers
achieving a certainty: e.g. when the responsiveness to the responsiveness to the
targeted output government estimates x regulatory policy campaigns
level e.g. Depends on PED number of hospitals
need to be built, x Campaigns and
number of hospitals can education
be built. And Mindsets are hard to
change know but dont
care

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284451/OFT1113.pdf
TASKS: Other than the healthcare market, what other markets justifies government intervention and why? What is the source or what are the sources of market failure in these markets? What policies should the government employ in these markets to
achieve efficient allocation of resources and other social goals? Can you think of real life examples for each specific policy? Remember to provide distinctly different policies. In terms of diagrammatic analysis, incorporate the policy into the market failure
diagram.

CLASSIFICATION OF MICROECONOMIC POLICIES 2: CIGARETTES

POLICIES TO REDUCE THE PRODUCTION/CONSUMPTION OF DEMERIT GOODS


(GOODS THAT ARE BAD FOR CONSUMERS BUT CONSUMERS UNDERVALUE THEM DUE TO IMPERFECT INFORMATION REGARDING PRIVATE BENEFITS OR
AND/OR BAD FOR THE REST OF SOCIETY BUT DUE TO THE PURSUIT OF SELF-INTERESTS, NEGATIVE CONSUMPTION EXTERNALITIES ARE DISREGARDED)
[examples are based on the cigarettes market in Singapore please provide specific examples that justify government intervention]
MARKET-ORIENTED POLICIES RULES AND REGULATION POLICIES TO INFLUENCE DEMAND
(COMMAND AND CONTROL)
Private sector supplies the good but government sets rules to regulate the behavior of the private Policies to regulate consumers Policies to influence information
firms. Penalties are imposed on the private firm who is found to have violated the rules. Policies to behavior flow
regulate supply or producers behavior in terms of:
Indirect taxes Output controls Price controls (Diagram) Campaigns /
(H2 only) Education
Explanation of how Indirect taxes increase COP E.g. Quota (Diagram) E.g. Campaigns increase information
each policy works shift supply curve to the left (or E.g. Ban (Diagram) Cannot smoke in public indoor areas or in more awareness but awareness
MPC curve upwards) price E.g. Cannot sell cigarettes to individuals under 21. the toilet on the plane is not sufficient, it must be
increase fall in ability to buy Heavy penalties are imposed on those who flout the accompanied by a change in
fall in Qd achieve AE rules mindset reduce demand
(Diagram) achieve AE
(Diagram)
1. Effectiveness in Not effective Not effective Not effective Not effective Effective
imperfect info

2. Time lag With indirect taxes, results can be Effects of policy can be felt immediately after the Effects of the policy can be felt immediately Longest time lag because mindsets
felt more immediately announcement of the policy after the announcement of the policy are hard to change

3. Ability to raise Generate tax revenue Whether tax revenue is generated depends on the
government revenue specific regulatory policy implemented. Can you think of
any examples
4. Desirability: Not equitable an indirect tax is a
regressive tax takes up a greater
percentage of the poors income
than the rich; Politically unpopular

5. Enforcement Yes Yes Yes Yes Yes


costs

6. Harm to Yes; indirect tax increases COP Yes; quota restricts supply raise P
competitiveness; shift Ss curve to the left P
impact on cost of increase
living

7. Degree of With indirect taxes, less certainty: Greater certainty Relatively uncertain depends on Least certain depends on
certainty in consumers responsiveness to the consumers responsiveness to
achieving targeted e.g. Depends on PED regulatory policy the campaigns
output level
Campaigns and education
And Mindsets are hard to change
know but dont care
TASKS: Other than the cigarettes market, what other markets justifies government intervention and why? What is the source or what are the sources of market failure in these markets? What policies should the government employ in these markets to
achieve efficient allocation of resources and other social goals? Can you think of real life examples for each specific policy? Remember to provide distinctly different policies.
CLASSIFICATION OF MICROECONOMIC POLICIES 3:EXAMPLE: POLLUTION
Assume negative MARKET ORIENTED RULES AND INFLUENCING DEMAND TECHNOLOGY CAP AND TRADE TAX ON POLLUTANT
production externality POLICIES REGULATION
(pollution generated by (COMMAND AND
firm) CONTROL) Private
sector produces but
subject to rules

Indirect Tax on output Quota on output that Education & campaigns Tradable permits on pollution itself Tax on pollution itself (e.g.
generates negative carbon tax)
ext (pollution)

How it works Diagram: Diagram: Diagram: Technology that reduces the MEC of production will 2 steps:1) Govt sets a limit on the max pollution Not in the syllabus
reduce the divergence between MSC and MPC of level allowed issue a fixed number of permits
Indirect tax increases Supply becomes Shifts demand curve production (e.g. case study 2 on building aircrafts equal to the max pollution level allowed allocates
COP shifts MPC curve perfectly price that pollute less) smaller deadweight loss permits to firms govt may give the permits to
upwards by the amount of inelastic at the reduce allocative inefficiency Diagram. each firm free of charge OR sell the permits to the
the indirect tax per unit targeted output level firms in the industry (quota diagram if sell permits)
increase in price fall in qd Technology that leads to a reduction in demand for
achieve AE if indirect tax the good that generates pollution, e.g. case study 2 2. Firms with excess permits are allowed to sell the
equals to MEC at socially on cleaner substitutes like high speed rail to reduce excess permits to firms who are short of permits
desired output level demand for air travel can also reduce allocative (Diagram for permits in the tradable market:
inefficiency in the market for air travel (here we must downward sloping demand curve for permits and
assume MEC increases as production of air travel upward sloping supply curve for permits up to the
increases). targeted level then perfectly price inelastic)

Achieve AE under Yes if indirect tax is set equal Yes if limit on output Yes if the effects of perfect Yes only if MEC rises as production rises Yes if the quota set coincides with the AE output Not in the syllabus
certain conditions to the MEC at the AE output coincides with AE information set in level
level output level

Certainty over Uncertainty due to changing Greater certainty as Greater uncertainty as mindsets are Greater certainty given that a quota is set initially Uncertainty as emissions vary
emissions revenue and cost conditions output is targeted hard to change with current energy demand
directly and supply

Efficiently encourages No. The tax is on the output No. No Yes. By putting a price on pollution itself, firms have incentive to reduce pollution if cost
least cost emissions and not on the pollution itself. of reducing pollution is lower than the price of permit those who can reduce
emissions most cheaply will do so pollution reduction at lowest cost to society.

Incentives for R&D and No; doesnt address the No; doesnt address Maybe. Education seeks not just to Yes; to avoid paying the price of pollution. In Yes; to avoid paying the price
adopt cleaner energy emissions directly the emissions directly raise awareness but also to change addition, excess permits can be sold to generate of pollution
mindsets/attitudes revenue.

Ability to raise Yes. Revenue can be used No No; incur government expenditure Maybe. Depends on whether the government gives Yes. Revenue can be used to
government revenue to fund environmental instead out the permits for free or sells it at a price fund environmental protection
protection activities. activities.

Administrative and Yes Yes Yes Yes Yes


enforcement costs

Harm to Yes; indirect tax increases Yes; quota restricts Maybe; increase in G increase AD Maybe; to buy the right to pollute, firms incur costs Yes; polluting firm that is taxed
competitiveness; COP shift MPC curve output to a targeted fall in spare capacity inflation pass it on to consumers; for firms that sell their can pass on the tax to the
impact on cost of living upwards P increase level increases P excess permits, they can lower costs & P consumers
reduce Qd

Practical or political Politically unpopular Politically unpopular Time lag; Takes a long time for the Politically unpopular Politically unpopular
obstacles to outcome to be realised
implementation