Out-of-pocket costs faced by the consumers
Given the assumption of a competitive market of Rapid Antigen Tests (RAT), the following are the impact of corresponding situations on the equilibrium price level and quantity demanded and supplied, and are also illustrated by relevant graphs.
The markets of Masks and RATs are related to each other, they are complementary goods. When the masks were first introduced gradually the need for testing kits for consumers were also introduced. When the government waives off the mandatory use of mask the demand for masks would fall, as rational human beings would lower their mask usage when they are not mandated, taking the government waiver as an indication that the virulence of the virus has lowered. In essence they too would demand less Rapid Antigen kits as they do not require to fear the virus anymore. This would lower the demand at the given price. The demand curve necessarily shifts downward to DD2 from DD1, there would be a fall in prices from P1 to P2 keeping that suppliers do not change their production at SS1. The market of RAT would shrink and the quantity bought and sold would fall to Q2 from Q1 as shown.
Figure 1.
If there is a current affairs program on television runs news that indicates Rapid Antigen Tests are ineffective to detect current variant of Covid, then the majority of the population will be discouraged to opt for this test for themselves and therefore the overall demand for this test will fall below the previous equilibrium point, the demand curve shifts downward towards the left. The level of supply of RAT would remain as it was and there fall prices to P2 and quantity would fall to Q2
Figure 2
If there is a production-related monetary incentive from the government in terms of subsidy to the manufacturers of Rapid Antigen Tests for the purchase of raw materials, say the test kits, then the producers will have to bear a lower cost of production for the RAT kits and will be encouraged to supply more RATs utilizing the scope of it, practically due to the fallen cost of production, the manufacturers shall also reduce the price of RAT to the consumers. Following the diagram below, the supply curve shifts to the right due to the rise in supply by the manufacturers. Moreover, due to the fallen price, the quantity demanded increases too. Concisely, the new equilibrium price falls and the equilibrium quantity rises as a result of incentives due to the government subsidy on production.
Figure 3
After several research on tests for Covid-19, when the researchers came up with the Reverse Transcription Quantitative Polymerase Chain Reaction (RTPCR) test to be more accurate in a way that there were cases when people were negative when tested on RAT but were positive when tested using RTPCR (Yamamoto et al., 2021). RTPCR became widely accepted and used to diagnose Covid-19 (Yamayoshi et al., 2020). This shows that consumers would demand RAT less than they did before as now a better technology equipped product is available in the market (Nagura-Ikeda et al., 2020). The change in technology makes RTPCR a better substitute of RAT; availability of substitute is the major factor which makes a change in the consumer behavior (Kritikos et al., 2021). This would lead to a fall in the demand for RAT and demand curve has shifted to D1 from D. there would also be a change in the supply of RAT as producers see that RTPCR is a better testing kit, they would reduce the supply of RAT; the supply would fall to S1 from S. There would prices to P2 from P1 and quantity would fall to Q2
Implementation of sales tax on sweetened drinks in Australia
Figure 4
Out of pocket costs are the direct monetary costs borne by the consumers that may or may not be eligible or possible to be reimbursed anyhow from any third-party source. Following are a few kinds of out-of-pocket costs faced by the consumers and below are a few examples provided for each correspondingly with relation to the health of the consumers.
- Co-insurance – It is a situation when the risk of insurance is borne by more than one party. For example, there are two health insurers for a company supporting the health benefits of the employees of the company. Now if a set of employees are affected by Covid and are being hospitalized, the two insurers will bear or ensure the cost of the treatment of the employees as per corresponding contracts with each employee.
- Deductible – It is an allowable expenditure following covered healthcare services before the health insurance plan is used to make the payment for any treatment that is under the contract. Say, the provision of masks and sanitizers by a company to its employees may fall under an employee benefit fund or scheme and is also a part of the deductible.
- Exclusions – The form of costs that are borne by the employees which are not under any health insurance benefit are called the exclusions, or non-allowable costs, say the general medical treatment of the employees, Covid related treatment may also fall under exclusions if an insurance plan or contract was made prior to Covid. Moreover, since Covid related treatments were made to separate health insurances and separate plans with specific names aiming to cover costs for only Covid related treatments after its emergence, therefore it is excluded by the insurers from most other health insurance plans.
- Flat rate benefits – These are the health insurance benefit in the form of a fixed rate or a fixed amount or a fixed percentage that is provided to an employee annually following their employment contract. For example, if an employee opts for a medical treatment that is covered by the health insurance scheme with a support of a flat rate of say 500 dollars, now if the cost of treatment is below 500 dollars then the insurer will pay the whole cost of treatment, if the cost of treatment exceeds 500 dollars then the insurer will cover for only 500 dollars, rest of the balance needs to be paid by the employee either from his or her pocket or by using other health insurance plans.
In Australia, as per 2012 figures, 1.29 billion liters of sweetened drinks are consumed by Australians annually. The average price is 1.7 dollars per liter for these drinks.
Assuming that the government wants to impose a sales tax of $x per liter on these soft drinks for the purpose of reducing the sales that are supply and demand of these drinks to 700 million liters from 1.29 billion liters. The price elasticity of demand for these drinks is given by -0.89.
- Price elasticity of demand of an item is defined as the degree of changes in quantity demanded as a result of the change in the price of that item and is formulated as,
Price Elasticity of Demand ()
In the question, is given as -0.89
Given the information about price and quantity above, if sales tax $x per litres is imposed on 1.7 dollars per liter, now the price rises to, say y,
Pf = 1.7+x , where is the absolute value of tax imposition per liter of the drink.
Using the formula of price elasticity of demand mentioned above the equation can be formed as,
- 89X – 0.296X = 1.0064
- 6x = 1.0064
- x = 1.677
Solving the above equation it can be found that x = $1.677
About $1.677 sales tax shall be imposed so as to reduce the sales of soft drinks to 700 million liters annually.
- Sales tax imposition of $1.677 will raise the tax revenue by, of $1.677*700 = $1173.9 million. Therefore, the overall tax revenue earned through the sales of 700 million liters per annum is $1173.9 million dollars.
- Theoretically or drawing from the simple theory of demand and supply in an economy, if the price of an item rises the demand for that item falls. Now imposition of sales tax will raise the total cost of purchasing the product in the market. Soft drinks can be considered inferior goods for a set of consumers; in that case rise in price will reduce the demand for soft drinks to a higher magnitude. Even if the soft drink is considered a normal good, then also the price rise will discourage consumers to consume that. The government’s initiative to impose a tax to raise the price of soft drinks and discourage their consumption seems quite feasible.
There are various working papers on the imposition of a sugar tax and the influence of the same on the consumption of sugar, diabetes, and obesity factors of the consumers. The aim of these papers is to present whether the implementation of a tax on sugary items reduces the consumption of those items and therefore decreases the chances or cases of diabetes and obesity among the consumers. The pros and cons of the government taking the initiative of a sugar tax in the context of Australia have been studied by Allen & Allen, 2020 and found that the imposition of a sugar tax on production has reduced the consumption of sugar among the general population. Although, according to the authors the impact of reduced consumption through sugar taxation on the obesity of the population remains quite unclear. Following the research-based in the US by Chaloupka, Powell & Warner, 2019 the consumption of tobacco, alcohol and sweetened beverages impact the overall health indicator of a nation, moreover, it gives rise to the excess health care cost which is, in turn, is a loss of productivity in the economy. Their findings show that the excise taxes help reduce the consumption of these above-mentioned products and diminish the adverse consequences on the health of the population. In addition, these taxes are making government accumulate more tax revenues and at the same time discouraging people to have unhealthy diet habits. The authors also portray the results and conclusion in the global context and the results are consistent with the results found for the nation.
Impact of sugar tax on consumption, diabetes and obesity
There is mostly the private competitive market structure in the goods and services market in the Australian economy. However, health care is an exception to this. Government shall intervene in the health care system for protecting the health of the general population of the nation. Following is an explicit discussion on the public health care system explaining why and how shall government intervene in the health care system.
The health care is a quasi public good meaning, both the private and the public market can produce them. Health care is an exception where the government intervention is required because of the presence of positive externality in the services. Positive externality is the benefit acquired to the third party who does not pay any price to the provider. Furthermore there are free rider problems in health care. The positive externality lies in the fact that, when the health care provisions are available to all each citizen have access to the healthcare services and medicines they would not have to be unhealthy living in a same society according to human rights also health care is a public right that each human being can exercise freely. Australia being one of the advanced Nations also request the fact that it keeps the working population healthy from the perspective that it has to increase its productivity in the longer run. This way the health care has positive externality which makes its marginal social benefit much higher than the marginal private single patient who get access to health care. The below diagram shows the extent of positive externality and also the fact that in private market health care is under produced which reduces the total social benefit. The government intervention is hence needed so that services can be subsidies or made free for everyone to have access and take the supply to the optimal level.
According to Edney et al., 2018 financing new healthcare technologies help improve net population health because the benefits of the introduction of new technologies in the health system are higher than the opportunity costs involved in it. The Australian health system is considered to be one of the most efficient health systems in the world as it makes sure to provide safe and affordable medical treatment to the citizens of the nation. The health care system in Australia is jointly run by every level of the Aussie Government that is, the federal or the central, state, local, and territory governments (“The Australian Health System”, 2022). Nonetheless, Australia has provided “medicare”, a universal public health insurance scheme that is administered regionally and is funded utilizing the tax revenue and levies earned by the government of Australia (“Australia”, 2022).
References
Allen, W. M., & Allen, K. J. (2020). Should Australia tax sugar?sweetened beverages?. Journal of Paediatrics and Child Health, 56(1), 8-15.
Australia. (2022). Retrieved from https://www.commonwealthfund.org/international-health-policy-center/countries/australia
Chaloupka, F. J., Powell, L. M., & Warner, K. E. (2019). The use of excise taxes to reduce tobacco, alcohol, and sugary beverage consumption. Annual review of public health, 40, 187-201.
Edney, L. C., Haji Ali Afzali, H., Cheng, T. C., & Karnon, J. (2018). Estimating the reference incremental cost-effectiveness ratio for the Australian health system. Pharmacoeconomics, 36(2), 239-252.
Kritikos, A., Caruana, G., Brouillet, R., Miroz, J. P., Abed-Maillard, S., Stieger, G., … & Greub, G. (2021). Sensitivity of rapid antigen testing and RT-PCR performed on nasopharyngeal swabs versus saliva samples in COVID-19 hospitalized patients: results of a prospective comparative trial (RESTART). Microorganisms, 9(9), 1910.
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.
Nagura-Ikeda, M., Imai, K., Tabata, S., Miyoshi, K., Murahara, N., Mizuno, T., … & Kato, Y. (2020). Clinical evaluation of self-collected saliva by quantitative reverse transcription-PCR (RT-qPCR), direct RT-qPCR, reverse transcription–loop-mediated isothermal amplification, and a rapid antigen test to diagnose COVID-19. Journal of clinical microbiology, 58(9), e01438-20.
The Australian Health System. (2022). Retrieved from https://www.health.gov.au/about-us/the-australian-health-system
Yamamoto, K., Suzuki, M., Yamada, G., Sudo, T., Nomoto, H., Kinoshita, N., … & Ohmagari, N. (2021). Utility of the antigen test for coronavirus disease 2019: factors influencing the prediction of the possibility of disease transmission. International Journal of Infectious Diseases, 104, 65-72.
Yamayoshi, S., Sakai-Tagawa, Y., Koga, M., Akasaka, O., Nakachi, I., Koh, H., … & Kawaoka, Y. (2020). Comparison of rapid antigen tests for COVID-19. Viruses, 12(12), 1420.
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