[Essay outline] A levels Qn. on opportunity costs of increased healthcare expenditure - 2016 P2A Q2

(b) Discuss how the opportunity cost of increased healthcare expenditure differs, depending on whether it is financed by individuals or the Singapore government. [15] (2016 P2A Q2)

Keyword (s) “population is aging” and” individuals”. Individuals refer to elderly citizens.

Thesis: The opportunity cost of increased Healthcare expenditure, if financed by individuals, will depend on their relative income or wealth levels.

The opportunity cost of increased healthcare expenditure for rich elderly citizens is the interest forgone from saving.

To the very rich who have satisfied their needs and most of their “wants”, increased healthcare expenditure is unlikely to cause them to forgo the consumption of another good which incurs similar expenditure levels (note that the alternative good cannot cost much more than the increase in healthcare expenditure). Instead, increased healthcare expenditure is financed through savings which compensate these individuals with interest. Interest rate is defined as the opportunity cost of holding money and in this instance, it is to finance increased healthcare expenditure.

The opportunity cost of increased healthcare expenditure for middle class citizens is forgoing of overseas holidays.

To these individuals who have retired and have more time on their hands, they are likely to increase their overseas holidays. However, with increased healthcare expenditure, they are forced to reduce their overseas trips.

The opportunity cost of increased healthcare expenditure for the poorer citizens is the foregoing of leisure due to the increase in their retirement age.

These individuals have inadequate savings to finance increased healthcare expenditure, and are, therefore, forced to continue working. For example, these individuals may become taxi drivers, and therefore, forgo the leisure which they would have enjoyed had they retire instead.

Anti-thesis: The opportunity cost of increased healthcare expenditure, if financed by the government, will be the goods and services whereby government expenditure is required to obtain allocative efficiency.

Increased healthcare expenditure requires the government to reduce its expenditure on public goods such as street lights.

With an ageing population, the positive externalities in healthcare will increase accordingly. For example, more health screening for the elderly enables the early detection of health problems, and therefore, increases the possibility of full recovery. This enables them to increase their retirement age and take fewer sick leave, and as the quantity and quality of labour increases, the potential growth for the country as a whole, increases. Increased healthcare expenditure, therefore, helps to attain allocative efficiency in the consumption of healthcare. However, with fading economic growth, tax revenue which is income-induced is unlikely to increase much. Holding government tax revenue constant, this necessitates reduced expenditure on street lights which implies that the quantity is now below the optimal level and allocative inefficiency results.

Synthesis: The opportunity cost of increased expenditure is higher for individuals. The opportunity cost is highest for the poorer individuals who may have to continue working beyond their retirement age and forgo leisure. This may not be an opportunity cost for the government since Singapore has abundant reserves to finance expenditure in all merit and public goods. Increased healthcare expenditure, therefore, does not imply a decrease in expenditure on public goods. With equity as a microeconomic aim, most subsidies are likely to be given to poorer individuals and this decreases their opportunity cost. They can now reduce their working hours and reduce their opportunity cost in terms of leisure forgone. 

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