Merit goods

Question 1

Define a merit good

Answer 1

A product that would be under-consumed in the free market

Question 2

What are the 2 reasons to why merit goods are underconsumed

Answer 2

1. imperfect information / irrationality
2. Inadequate income

Question 3

Why does imperfect information and irrationality cause under consumption

Answer 3

• Consumers may lack info about the benefits of consuming the merit good
• Consumers may irrationally focus too much on the short term gain, ignoring the long term loss or vice versa

Question 3

Why does inadequate income cause the under consumption of merit goods

Answer 3

They can’t afford to purchase merit goods without sacrificing essentials
ie equity issue

Question 4

What are 3 examples of merit goods

Answer 4

• Education e.g. books/museums
• Healthcare e.g. vaccines
• Eating a healthier diet causes less healthcare costs/strain on NHS

Question 4

Why do merit goods cause positive externalities in consumption

Answer 4

They cause spillover benefits for society as a whole

e.g. reduce crime rate, herd immunity and reduced stress on the NHS

Question 5

How are the positive externalities of merit goods shown on a diagram

Answer 5

MSC is greater than the MPC

Question 6

Why do merit goods cause a net-welfare loss

Answer 6

They are being consumed below the socially optimum level

Question 7

What are the 4 ways of boosting the consumption of merit goods and reducing market failure

Answer 7

1. Legal compulsion
2. Advertise/educate consumers
3. Subsidies to increase demand
4. Making it free, funded by tax e.g. NHS

Question 8

What are the 4 main ways government failure can occur when dealing with merit goods

Answer 8

• Education/advertising may not work
• Productive inefficiency
• Difficulty ensuring allocative efficiency in health care
• Moral hazard

Question 9

Why can productive inefficiency occur during the government intervention of merit goods

Answer 9

• The NHS and state schools are monopolies
• There is no competition
• No incentive to innovate/ increase productivity

Question 10

Why can difficulty ensuring allocative efficiency occur during the government intervention of merit goods

Answer 10

• healthcare is perfectly inelastic in supply
• if it is free, demand is at its max, leading to excess demand

Question 11

Why can moral hazard occur during the government intervention of merit goods

Answer 11

Free healthcare provides an incentive for people to behave worse e.g. smoke, drink, play dangerous sports

Question 12

What are 2 possible solutions to government failure

Answer 12

1. Provide on a means tested basis
2. Decrease the consumption of demerit goods to decrease moral hazard