Health Economics: Impact of Price Elasticity on GP and Emergency Services

HEALTH ECONOMICS
STUDENT ID:
[Pick the date]
1

Question 1
a) The reduction in the co-payment for GP services would lead to higher prices for the GP
services since contribution from the consumers will decline. In order to compute the impact
on GP utilization impact, the price elasticity needs to be considered which is given as -0.2.
The impact on GP utilization level is indicated below.
Percent change in GP utilization level = 10%*-0.2 = -2%
It is noticeable that the price elasticity for GP consultation is -0.2 which highlights the
inelastic nature of demand. Owing to demand being inelastic, higher prices would tend to
lead to higher expenditure on GP services. This may be explained owing to lower decrease
in utilization levels even though price levels have increased by a greater extent in percentage
terms.
b) Price elasticity of emergency department services = -0.05
Percent change in price of emergency services =10%
Hence, percent change in demand for emergency services = 10%*(-0.05) = -0.5%
From the above computation, it is evident that there would be a 0.5% decrease in demand of
emergency services.
c) The relevant diagram is shown below.

In the given case, the consumer initially is at point E1. However, as there is an increase in the
GP price, there is a shift in the budget line which would now becomes AB1. Owing to shift
in the budget line, the new indifference point becomes E2. It is evident from the comparison
of the two points that there is a decrease in the demand for both GP consultations as well as
emergency services.
Question 2
(a) There are several features of tobacco smoke that tend to create externalities. The most
common one is air pollution owing to the toxic fumes. As a result, the person in the vicinity
who inhales this polluted air tends to be subject to passive smoking which over a sustained
period of time may lead to lung cancer and other respiratory ailments. Additionally, the
productivity of the passive smoker over time would be adversely impacted since illness
would physical and financial burden. This would further be extended to the government and
taxpayers as part of the healthcare cost involved in any healthcare is subsidized.
With regards to the active smoker also, there is high risk of lung cancer and other ailments. This
not only tends to have an adverse impact on productivity, it would lead to family distress.
Further, studies have indicated that smoking is one of the causes responsible for financial
inequality. Additionally, smoking as a phenomena tends to lower the productivity of the
economy while diverting the taxpayer money towards treatment of these ailments.
b) a. The externalities are negative since tobacco smoking tends to have unintended negative
impact which has been detailed above. The impact of smoking on both active and passive
smokers is negative particular related to adverse health and economic effects.
b. The externalities are consumption linked since these are caused not by the production of
tobacco and its products. These are instead caused due to tobacco smoking and hence are linked
to consumption.
c) Owing to externalities, deadweight loss is realized with regards to consumption of tobacco.
This is highlighted through the diagram shown below.