Merit goods Flashcards
Define a merit good
A product that would be under-consumed in the free market
What are the 2 reasons to why merit goods are underconsumed
- imperfect information / irrationality
- Inadequate income
Why does imperfect information and irrationality cause under consumption
- 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
Why does inadequate income cause the under consumption of merit goods
They can’t afford to purchase merit goods without sacrificing essentials
ie equity issue
What are 3 examples of merit goods
- Education e.g. books/museums
- Healthcare e.g. vaccines
- Eating a healthier diet causes less healthcare costs/strain on NHS
Why do merit goods cause positive externalities in consumption
They cause spillover benefits for society as a whole
e.g. reduce crime rate, herd immunity and reduced stress on the NHS
How are the positive externalities of merit goods shown on a diagram
MSC is greater than the MPC
Why do merit goods cause a net-welfare loss
They are being consumed below the socially optimum level
What are the 4 ways of boosting the consumption of merit goods and reducing market failure
- Legal compulsion
- Advertise/educate consumers
- Subsidies to increase demand
- Making it free, funded by tax e.g. NHS
What are the 4 main ways government failure can occur when dealing with merit goods
- Education/advertising may not work
- Productive inefficiency
- Difficulty ensuring allocative efficiency in health care
- Moral hazard
Why can productive inefficiency occur during the government intervention of merit goods
- The NHS and state schools are monopolies
- There is no competition
- No incentive to innovate/ increase productivity
Why can difficulty ensuring allocative efficiency occur during the government intervention of merit goods
- healthcare is perfectly inelastic in supply
- if it is free, demand is at its max, leading to excess demand
Why can moral hazard occur during the government intervention of merit goods
Free healthcare provides an incentive for people to behave worse e.g. smoke, drink, play dangerous sports
What are 2 possible solutions to government failure
- Provide on a means tested basis
- Decrease the consumption of demerit goods to decrease moral hazard
