Economics case study Essay
Economics case study
(a) Explain whether health care is a private , merit or public care
(b) Is health care a free good? Explain your answer
(c) Does the quote from the doctor suggest that the market for healthcare is in equilibrium? Again explain your answer
(d) Compare the effects of an improvement in the quality of product provided by the NHS and that provided by a private health care company
(e) Explain 2 meanings of the word ‘efficiency’
(f) What is likely to happen to private sector firms which are not efficient?
(g) In which market structure is information about best practice likely to be most freely available
(h) Discuss the private and external benefits of health care.
a) A public good is a good that is a benefit to society and is provided free of cost to society, usually by the government running the country. Theses goods are not provided by private companies and firms as they do not render profit, which thus leads to a market failure due to a lack of provision of public/merit goods.
Examples for such goods are roads, streetlights, education, public libraries etc.
NHS (National Health Service) is a public good and government organization. It is a service that is ‘free at the point of delivery’ because society pays for it indirectly through taxes.
The NHS provides free healthcare to society, this is especially beneficial for the low income group sector of society thus making it a public good. The demand for this service is high, as healthcare is very expensive in the private sector.
As the law of demand states that when the prices increase demand decreases. Here there is no actual price for the service thus the demand must be high. But sometimes this high demand creates a problem as the supply cannot be met; public goods are goods that do not render profits.
And thus these organizations are run by government spending and may not really be updated with the best quality as they have a limit in their budgets. They do not have the quality of being efficient as they do not make profits from their services.
b) A free good is good that is not scarce, has a zero market price and do not have any opportunity costs when consumed. The key word is opportunity cost.
(***Free good is a term used in economics to describe a good that is not scarce. A free good is available in as great a quantity as desired with zero opportunity cost to society.)
Opportunity cost is the cost of forgoing one opportunity for another. For example – A school has been given 10,000$ and it can either spend it on books and supplies or on a new gym. Thus the opportunity cost to build the gym would be the loss of not buying books and vice versa.
An example for free good can be sunlight, air, salt water etc.
Considering healthcare, it can be noted that healthcare does not fall into the category of free good.
It is an economic good even a public organization like the NHS. As NHS is a government funded subject, it is actually just a free service at the point of delivery. The taxpayers pay for this good; therefore it does have a market value indirectly through taxes. And it is not a resource that is available all the time, thus making it limited and not scarce.
As it is government funded, the government can choose to spend their money on something else instead of healthcare. Therefore there is an opportunity cost to providing healthcare. The government can may spend the same amount on public structures (roads, streetlights, traffic lights or on education etc). As provision of healthcare has an opportunity cost, it makes it an economic good and not a free good. (*** Economic good is a good that has an opportunity cost thus giving it a price and hence making it scarce.)
c) The market for healthcare (pubic healthcare) is not in equilibrium as the doctor quotes”we just get more patients and we can’t cope with anymore”. Therefore suggesting that the supply cannot meet the demand and thus the market equilibrium is not met.
Market equilibrium is when the market is in a stage where the demand meets the supply.
For eg – In the figure below, we see that at price P1 the quantity Q1 is both demanded and supplied. Thus the market in equilibrium at the price P1 since the quantity of goods that people wish to buy at price Q1 is equal to quantity of the goods the supplier wants to sell at that price. This price P1 is also called as market clearing price, as everything produced is sold. The market thus remains in equilibrium.
The healthcare sector (NHS) does not follow this structure of market equilibrium. The figure below shows the demand for healthcare in the private and public healthcare.
This follows the demand laws that when prices increase then the demand for the good decreases as can be in seen in the demand for private healthcare services. Whereas the demand for public healthcare is very high as the price is very low or minimal. (Figure 1)
Figure 2 – When the prices are low then the suppliers supply less of their goods. In the case of healthcare (public healthcare), the providers of this services may not be provide less of their services but the quality and efficiency may be less and improvements may not be made as they are Government organizations and do not have the funds to do so.
Figure 3 shows that because of the low prices the demand for the service increases to Q2 and the healthcare providers can only provide services till Q*. More is being demanded than supplied, and thus there is a shortage as there is an excess of demand. Therefore the market equilibrium is altered as the supply does not meet the demand.
d) Improvements in the quality provided by the NHS and the private healthcare company.
The private sector’s main motive is to earn profit. Any private company or firm’s main goal is to earn profit. This can be done by having a large consumer base, thus to get achieve a large consumer base the firms continuously improve their services and are always striving for efficiency.
Therefore an improvement in the private healthcare sector would not make a big difference as these firms are already always trying to provide better services to the consumers in order to make profits.
Even though the prices are higher than the public sector people would with money would chose to a private clinic rather than a government healthcare facility, as it would be wiser for them to make use of the better healthcare facilities.
If there are improvements in the public sector, the efficiency of the sector is improved and a lot more people would prefer going to public healthcare facilities rather than spending more money for the same service at a private clinic. The demand for the private healthcare services would decrease, and the firms would have to come up with innovative methods to restore their consumer base as a majority of the consumers would prefer paying less for healthcare for the same services provided by the private sector.
The private healthcares may even have to shut down due to increasing costs in running their facilities and fewer buyers for their services thus decreasing the revenue they earn. There would be a producer loss for the private sector and a consumer gain for the consumers as they pay for good quality healthcare at a cheaper rate. But this would mean more government spending on healthcare to ensure that the new improvements continue. Or the government may increase the taxes, and thus the tax payers would have to pay more taxes in order for better public healthcare.
e) Efficiency – getting any given results with smallest inputs or getting maximum output from minimum inputs
Efficiency can be classified into 2 categories –
* Efficiency in consumption ( Allocative efficiency )
* Efficiency in production ( Productive efficiency )
Allocating resources among consumers so that it would not be possible by any re allocation to make people better off without making anyone worse off is called efficiency in consumption.
Allocative efficiency in simple terms can be put as “doing the right thing”. Defining Allocative efficiency – when there is no waste in resources in the production of goods, allocative efficiency is maximized.
This occurs when there is 0 excess demand and supply in the market (S=D). For eg – when a firm produces 5000 flower pots but the market enables the firm to sell only 3500 then the resources have gone waste by producing the excess 1500 goods and there is an inefficiency in the allocation of resources as they could have been better allocated.
The firm could have used the same amount of resources for something like fertilizers which would have had a higher demand. Therefore the allocative optimality occurs when the supply equals demand on the market.
Allocating available resources between industries so that it will not be possible to produce more of some goods without producing less of others is called efficiency in production.
Productive efficiency occurs when goods are produced at the lowest possible cost per unit, taking into account all costs arising. A firm is productively efficient when total use of resources (factors) result in the lowest possible cost per unit of output. This would be the point where average total is minimized. Productive efficiency means “doing things right”.
In the healthcare sector being economically efficient as well as productively efficient is what the private clinics, hospitals etc aim for. To supply the maximum output at the cost of minimum inputs.
f) Private firms that are inefficient would not be able to compete with other firms in a competitive market. If a firm is inefficient, the demand for the firm’s services and goods decrease and the firm’s consumer base will move on to another firm that does provide efficient goods and services. Or if a firm is allocatively inefficient then its resources go waste and it is unable to make the same revenue like it would have if it had used proper allocation of resources. Lack of productive efficiency would lead to the cost of production to be higher therefore the firm would suffer losses. Taking the 3 different situations in private healthcare –
* Inefficient services and quality provided: would lead to the loss of customers and eventually revenue, and more competition from other firms.
* Improper allocation of resources(spending): spending and wasting money on frivolous items such as curtains and dï¿½cor rather than medicines and treatment facilities , the firm would have a decrease in revenue again as people would expect top quality services rather than fancy dï¿½cor.
* Costs of production and services > revenue earned = loss: the firm has spent a lot more on setting up the place and is not gaining maximum profits in return thus being productively inefficient.
g) In a private structure information about best practice is likely to be freely available, as in public sectors there is not much incentive to improve techniques and skills. Whereas in the private sector the commercial organizations have an economic incentive to introduce better practices for both market leadership which leads to profits. Eg – 2 dentist clinics each one comes up with newer faster and high quality technology for braces such as clinic1 comes up with ‘invisible braces’ and clinic 2 to outdo clinic 1 comes up with ‘invisible painless clear fit on braces’ to form a larger consumer market. Whereas in public sector there would be no such highlight as there is no one to compete against and no economic incentive.
h) Merit goods are goods that are beneficial to the society and include services like healthcare defense etc. The marginal social benefits in providing healthcare are greater than the marginal production costs. For this reason healthcare is normally left up to the government to provide in many countries as private sector owners find no profit making scheme through it. The private and external benefits of healthcare are many.
* Society remains healthy
* When society remains healthy then the major workforce remains fit as well
* Provision of healthcare = public good, like the NHS makes it easily accessible to the low income society.
* If the main workforce of a country has access to healthcare, the overall development of a country increases.
* The government also encourages the use /consumption of this service, as it is beneficial for all.
* The healthcare services provided, if of good quality, makes sure that everyone in society gets their vaccines, health checkups etc. Thus ensuring that everyone is stable and in a well fit environment.
* These services are more beneficial for the lower middle and poorer section of society. The poor do not need to spend much of their little incomes and are assured of the basic services.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 12 November 2017
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