A-Level Economics Model answers
The NHS is an example of a government provided service.
Discuss whether services such as healthcare should be entirely provided by the government rather than an alternative method of intervention like governments subsidisation of firms.
Here is a question and answer from the markets and market failure section of the A-level Economics syllabus.
This question is a ‘discuss’ question.
THE FREE ESSAY PLAN BELOW CAN BE USED AS A GUIDE TO HELP YOU WRITE YOUR RESPONSE.
NEED MORE HELP?
Book a trial lesson and boost your grades.
Discuss whether services such as healthcare should be entirely provided by the government rather than an alternative method of intervention like governments subsidisation of firms.
FREE Model Answer Guide
DEFINITIONS
Market Failure
Market failure can be defined as when the free market mechanism fails to allocate economic resources efficiently. Healthcare is an example of a merit good and thus would result in free market failure without intervention from the government due to lower consumer demand than desirable. Therefore, the market fails to maximise social welfare due to underconsumption. Social welfare would therefore increase if more people consumed healthcare under free market conditions.
Background to the problem
This is why, in the UK, the government has intervened to increase consumption of healthcare services to socially desirable levels. There are a variety of reasons why a free market would fail to allocate healthcare services at socially desirable levels. Firstly, healthcare is very expensive and for the majority of people would be a service that would be unobtainable. The market isn’t failing because doctors are expensive to hire (as doctors’ pay is determined by the skillsets they have and the many years of training and education they’ve acquired). The market is actually made worse perhaps by the fact that income and wealth is unevenly distributed throughout society, which is why the poorer in society are unable to afford it. Secondly, healthcare and medicine is a very complex field which most people do not understand fully. Therefore, there exists an information problem for the consumers of healthcare. They are unaware of when they should see a doctor and some do not see the importance of going for regular check-ups.
These are some of the reasons why underconsumption exists in this market, and it is important for the government to know this before deciding on intervention strategies.
How to solve the problem
The UK government currently solve this problem by fully providing the NHS using taxation revenues. Therefore, the service is effectively free to use in the majority of cases. This is an effective way of making healthcare available for residents of the UK and correcting the market failure of underconsumption. To solve the problem entirely, we must analyse the following diagram:
A diagram to show the merit good problem, which relates to healthcare. Healthcare is underconsumed by the free market.
[INSERTING A DIAGRAM TO SHOW MARKET FAILURE WILL GET YOU MORE MARKS IN YOUR EXAM! NEVER FORGET TO INSERT AT LEAST ONE DIAGRAM WHEN YOU CAN.]
The free market equilibrium is illustrated on the diagram and Q1 quantity is consumed. According to the social welfare maximisation condition (MSB = MSC), the quantity society should be consuming is Q*. There exists two problems: 1) in order to provide more firms will need higher rewards (P*) 2) in order to consume more consumers require a lower price.
This is why government provision could be deemed as an effective method of intervention as making the NHS free allows consumers to benefit and supply can be increased to the level necessary (Q* on the diagram) with taxation money.
Another reason that state provision of healthcare is a good thing is because taxation revenues are used to provide the service. As the UK uses a progressive taxation system (where income grows you are taxed progressively more), it helps redistribute income in the economy and lessen inequality which is one of the root causes as to why the market was underproviding in the first place.
However, there are some downsides to state provision of the NHS. Firstly, any spending of taxation revenues incurs opportunity costs. An opportunity cost is the cost of the next best alternative foregone. In this case, if the government were to spend £1 billion on funding the NHS, then that would mean £1 billion is not available to spend somewhere else. Therefore, the government must be sure that the benefits gained to society from spending on the NHS exceed the benefits gained by spending elsewhere – otherwise, this is an example of a government failure. The government would have failed to best allocate scarce taxpayer money in order to fulfil its objective of improving social welfare. The government would also need to know exactly where Q* is on the diagram. Knowing that would require investment into information gathering which costs money and could also be wrong.
Secondly, there is an absence of market forces which could lead to inefficiencies. In a free market, where healthcare is privately owned by firms, things like competition and the profit motive drive firms to be efficient. If there is enough competition, a healthcare firm would be encouraged to produce at the lowest average cost (productive efficiency) so to compete with the rest of the market and not lose market share. Secondly, there is an absence of the price mechanism to signal to the government how to best allocate resources. In a free market, when demand is falling it encourages firms to decrease their prices. The falling of the price indicates to firms to produce less and therefore not waste scarce resources and re-establish equilibrium in the market. With the NHS, pricing information is not there so there is a greater likelihood of excess demand and supply occurring and therefore a misallocation of resources. However, in reality the NHS does not provide 100% of its healthcare itself. Instead, it sometimes hires private firms to carry out procedures which can partially solve this problem and makes government provision more effective as a result.
Thirdly, making the NHS free reduces the independence of the consumer. The consumer could potentially abuse the NHS just because it is free. Going for check-ups when not needed and wasting the doctor’s time for minor sicknesses are examples of this. Because of the UK’s EU membership (soon to be expired), it also means that those within the union are able to benefit from the UK’s healthcare system. This opens up the UK to further potential misuse of the service. However, this is probably a small issue in the real world and is likely not a deciding factor why the government should not provide the NHS.
Overall, UK government provision of the NHS is likely to continue being successful and while there are some problems to face with complete state provision, these problems can be resolved.
Now we understand the pros and cons of state provision of the NHS, we can now compare this to the use of subsidisation as an alternative intervention strategy. In this case, the government would subsidise private healthcare firms rather than be the sole provider of the service.
Subsidies would be effective as the market price should decrease with sufficient competition, which could therefore increase demand in the market for healthcare. We can see this on the following diagram.
A diagram to show how subsidisation can increase the provision of healthcare.
With a subsidy introduced in the market the firm would be able to provide more than before, so the original market price of P1 would create excess supply. Price would then decrease to the point P2 which would re-establish equilibrium at the point Q2.
However, a subsidy may not be effective as it would depend heavily on the price elasticity of demand for healthcare. If inelastic, the subsidy would not make such a big difference in the market allocation of resources.
Secondly, what the government needs to carefully examine is the behaviour of the firms being subsidised. With a subsidy, it could encourage firms to become less efficient than before and make savings in costs. Furthermore, the firms may not even pass on the benefits to the consumers and instead absorb the benefits for themselves – although this is less likely with enough competition.
Finally, subsidies would still be costly for the government. While the government may save taxpayer money in this example, opportunity costs still exist and when firms provide the service the government is unsure about how they provide the service. A firm’s objective is to make profits and sometimes this does not line up with looking after patients properly. What may happen is the standard of healthcare actually falls, as the firm is looking to maximise its own welfare. This would be especially bad for the more vulnerable in society like the elderly and the poor.
Overall, subsidisation would probably also be an effective policy but the main difficulty is at what price should NHS services be set at in order to maximise the net benefits. The problem is made more complex due to the amount of services within the healthcare industry from emergency operations to cosmetic surgery. These products do not offer the same benefits to society and therefore is subsidisation incentivising more supply of emergency operations or cosmetic ones? As the subsidy is paid to the firm it is up to the firm to regulate its own supply according to market forces. Market forces are not always right as we found out earlier due to problems like information failure.
In conclusion, there are pros and cons for each respective policy. The NHS is certainly a flawed system in the UK in that it is incredibly wasteful due to the sheer size of healthcare services provided. It can be argued that private healthcare would not be wasteful like the NHS as smaller, more efficiently run firms respond to the profit motive and threat of competition when providing services. However, there is a fundamental difference between the two examples, that being the provider. The NHS is provided for by the government and one of the government’s objectives it to look after and improve the welfare for those in society. As long as the government is not corrupt, this vital difference is what I believe to be the reason why the UK is better off sticking with the NHS over private healthcare. Secondly, the NHS is a standardised service throughout the UK. It means that no matter your income and no matter where you live, you are still guaranteed a minimum standard of healthcare which is provided for by the government. Again, this ensures that society’s welfare (as a whole) is being maximised.
Overall, I believe the UK is better off sticking with the NHS and instead looking for ways of becoming more productively and allocatively efficient.
Want the full model answer?
10 Past Papers with Model Answers on Market Failure
Written by an experienced Economics tutor
Full model answers with diagrams
Suitable for all UK Economics exam boards
Physical booklet
£20.00
All orders will be delivered within 1-2 weeks.