Model essay (b): are subsidies the best policy?

What this lesson teaches

• I can explain why a government steps in to improve efficiency and equity.

  Syllabus 9570, 2.3.3(a). Microeconomic Policies: Microeconomic policy decisions undertaken by governments to achieve microeconomic objectives in relation to efficiency and equity

• I can explain how taxes, subsidies, quotas, tradeable permits, provision, rules and public education correct market failure.

  Syllabus 9570, 2.3.3(b). Microeconomic Policies: Policy measures including taxes and subsidies, quotas and tradeable permits, joint and direct provision, rules and regulations, public education in achieving efficiency and equity

• I can judge how well each policy works and explain government failure.

  Syllabus 9570, 2.3.3(c). Microeconomic Policies: Effectiveness of policy measures and government failure

Make a guess

Many young adults skip the flu jab because they think flu is harmless. Will a subsidy solve this?

1. A little, but their main barrier is not price.
2. Yes. A lower price brings a large rise in take-up.
3. No. Subsidies do not affect choices about health.

The answer to part (b)

Introduction

A subsidy is a payment by the government that lowers the cost of a good to the buyer. Other ways to raise vaccination are public education, nudges such as reminders, and rules that require vaccination. This essay argues that a subsidy is the best single tool against the externality. But it works best alongside education and nudges, because price is not the only barrier. The judgement depends on what stops people getting vaccinated and on the cost to the government.

Paragraph 2: a subsidy internalises the externality

A subsidy equal to the marginal external benefit (MEB) internalises the externality. In Figure 2, the subsidy lowers the cost the buyer faces, from MPC to MPC - subsidy. Consumers now choose where MPB equals MPC - subsidy, at Qs. This is the socially efficient quantity, where MSB equals MSC, so the deadweight loss is removed. The buyer still chooses, so people who gain most from vaccination take it up first. Singapore already uses this approach: it subsidises the vaccines on its national adult schedule, including flu vaccines for older adults, at polyclinics and many GP clinics.

Paragraph 3: it helps those most at risk

A subsidy also helps the people most at risk. For a retiree on a low income, even a small fee can put off vaccination. When the price falls, more vaccinations are demanded, mostly by people for whom price was the barrier. A subsidy is also easy to run through existing clinics. The government can target it, giving larger subsidies to older and lower-income people. So a subsidy raises vaccination while also making healthcare fairer, which matters in a society that is ageing quickly.

Paragraph 4: it does not fix information failure

However, a subsidy only works if price is what holds people back. If people skip the vaccine because they think flu is harmless, or keep putting it off, a lower price changes little. Their demand is price-inelastic: the quantity demanded hardly rises when the price falls. Even a free vaccine still costs time and an injection. Public education works on the real cause. Campaigns that show how serious flu can be shift perceived MPB up towards actual MPB. Nudges help too. A text reminder with a ready-booked appointment makes vaccination the default, so people must opt out. Present bias then works for vaccination instead of against it.

Paragraph 5: it is costly and hard to set

A subsidy also has costs. It is paid from tax revenue, which has an opportunity cost: the same money could fund hospital beds or schools. The MEB is hard to measure, so the government may set the subsidy too high or too low. It also pays for people who would have been vaccinated anyway. A rule that requires vaccination would raise the rate faster and cost the budget less. But it is hard to enforce, may cause resentment, and forcing adults to accept a medical treatment limits personal freedom. Such rules suit very dangerous, highly infectious diseases better than seasonal flu.

Paragraph 6: evaluation

Whether a subsidy is best depends first on the main barrier. For older and lower-income people, price and access matter, so a subsidy works. For young, healthy adults, the barriers are information and habit, so education and nudges work better. It depends second on cost-effectiveness. Reminders and education are cheap. Subsidies cost more, but they reliably remove the price barrier. Singapore's ageing population settles the balance. Older people gain most from vaccination and can spread flu in care homes and families, and for them cost matters most. So a targeted subsidy should be the core policy, with cheaper education and nudges for the groups that price alone will not move.

Conclusion

Subsidies are the best single way to correct the positive externality from flu vaccination, especially for older and lower-income Singaporeans. They are not enough alone, because information failure and present bias keep many people from vaccinating whatever the price. The best policy is a targeted subsidy combined with public education and simple nudges such as reminders.

Margin notes: how each paragraph scores

Introduction

Defines the policy, lists the alternatives it will be compared with, and gives a stand and two criteria. The rest of the essay follows this map.

Paragraph 2

L3 analysis: the subsidy's size (equal to the MEB), the shift in Figure 2 and why the DWL disappears. Ends with Singapore context.

Paragraph 3

A second strength, equity, explained through who responds to the lower price. It uses the ageing population, which returns in the evaluation.

Paragraph 4

The counter-argument links back to the information failure from part (a). It uses price elasticity of demand to explain why the subsidy may fail, then explains how the alternatives work.

Paragraph 5

Covers government failure (the MEB is hard to measure) and opportunity cost, then weighs rules fairly instead of dismissing them.

Paragraph 6

E3: two well-explained judgements (the main barrier, cost-effectiveness), then a deciding factor from Singapore's context. Each judgement weighs; none just repeats earlier points.

Conclusion

Answers 'whether ... the best way' directly and gives a clear policy recommendation.

Overall: L3 and E3, 13 to 15 marks

Two-sided analysis with a correct policy diagram and alternatives compared. If paragraphs 4 and 5 were missing, the analysis would be one-sided and stay at L2 (5 to 7).

Worked example: A 4-minute plan

Fix the stand and the criteria first, then sort the arguments under them.

1. Stand: best single tool for the externality, but not enough alone. Criteria: the main barrier, cost to the government.
2. For: internalises the MEB (Figure 2); helps the elderly and lower-income; easy to run.
3. Against: weak if demand is price-inelastic, since information failure and present bias remain; costly, hard to set, pays those who would vaccinate anyway; rules are an alternative.
4. Judge: targeted subsidy for the elderly plus cheap education and nudges.

Watch out for this

A subsidy will fix underconsumption whatever the reason people are not getting vaccinated.

A subsidy works on price. Some people skip the vaccine because they think flu is harmless, or keep putting it off. Their demand barely responds to price, so education and nudges target the real cause.

Check your understanding

Which point is the strongest evaluation of the subsidy in this essay?

1. It works best for older and lower-income people, for whom price is the main barrier.
2. A subsidy shifts the cost curve down, so consumers move from Qp to Qs.
3. Subsidies have both advantages and disadvantages, so the answer depends on the situation.