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Methods of Increasing Provision of Merit Goods

Discuss two methods of increasing the provision of merit goods in a mixed economy. Consider which is more likely to be effective. [12]

Category:

Public Finance and Government Intervention

[CIE A level May 2017]

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Answer


Step ➊ : Define ‘merit goods’ and ‘mixed economy’ in the introduction.


There are several ways of increasing the provision of merit goods in a mixed economy. A mixed economy means that part of the economy is left to the free market, and part of it is managed by the government. A merit good is defined as a good that is better for a person than the person who may consume the good realises. For example, education is often considered as a merit good. The individuals who make decisions about how much education to receive do not fully appreciate quite how much benefit will be received through being well-educated. This is why merit goods tend to be underconsumed and underproduced due to information failure. Thus, the government must step in to increase the provision of merit goods in a mixed economy.


Step ➋ : Discuss two methods of increasing the provision of merit goods in a mixed economy.


There are several methods the government could use to increase the provision of merit goods.
(choose TWO options)

➤ 2.1 Subsidies may be used to increase the output of merit goods to the socially optimum level.

The figure below illustrates how the subsidy would operate.

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With information failure, the equilibrium price and quantity demanded and supplied for merit goods is at P1Q1. If consumers were better educated about the benefits of merit goods, then the demand curve would shift outwards from D1 to D2. The new equilibrium quantity would increase to Q2. Thus there is an under-consumption of merit goods of Q1 to Q2 in the free market.

A subsidy payment will lead to a shift to the right in the supply curve from S1 to S2. Introducing a subsidy in the market results in a fall in price from P1 to P2. The lower price would encourage consumers to buy more of merit goods. The quantity demanded and supplied of the merit good rises from Q1 to Q2. The under consumption and underproduction of the merit good is eliminated.

➤ 2.2 The government may provide consumer information

When imperfect information is a reason for market failure, the direct provision of information by the government may help to correct that failure. An example is the provision of consumer information on the benefits of innoculations against diseases. Education campaigns are designed to improve information and as a result increase the demand for the merit good, raising price and leading to an extension in supply.

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With information failure, the equilibrium price and quantity demanded and supplied for merit goods is at P1Q1. If consumers were better educated about the benefits of merit goods, then the demand curve would shift outwards from D1 to D2 . The new equilibrium quantity increase to P2Q2 . Thus there was previously an under-consumption of merit goods of Q1 to Q2 in the free market.

(method 3 choose 2)

➤ 2.3 Goods and services may be directly provided by the government

Merit goods such as health care and education can be provided for free at the point by the government and paid for out of general taxation. If no charge is levied on those who go to college or hospital, they will be encouraged to enjoy their benefits. Furthermore, education can be made compulsory in order to ensure that the youth receives the knowledge they need for a better future.

Direct government provision of merit goods may also give rise to large economies of scale, and may thus be productively efficient. For example, when a service such as health care is provided to the population as a whole, greater scale economies are likely to arise in terms of capital and labour costs.

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Step ➌ : Discuss why these policies are not always effective.
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It should however be noted that these methods are not always effective

It is argued that direct government provision of health and education will lead to an undesirable situation of state monopoly power. Furthermore to increase consumer choice, lower costs and raise the level of efficiency, there is the need for greater competition.

If the government subsidises a merit good or provide them directly free of charge, there may be a significant rise in the consumption of the good and this may lead to shortages. This is because producers have trouble keeping up with the sudden rise in demand. For example, there might be a lack of beds in hospitals or not enough seats in schools and colleges.

Another drawback of subsidies is that it is difficult to measure their positive externalities to quantify the extent of their success. Although they may have extremely positive benefits, the government will have a difficult time measuring the success of subsidies to make an informed decision about their future implementation.

The weakness of education campaigns is that these campaigns tend to be expensive and they may not be successful if poorly designed.

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Step ➍ : Discuss which policy is most effective.
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To conclude, the most effective method to increase the provision of merit goods in a mixed economy might be to directly provide merit goods and in certain cases, make it compulsory. For instance, merit goods such as primary and secondary education is provided free of charge and made compulsory in most countries in order to ensure that the youth receives the knowledge they need for a better future. This has proven the most effective way to increase the provision of merit goods. Other methods may be less effective for several reasons. When the government provide subsidies to producers of merit goods, this will shift the supply curve to the right, driving down costs. However, consumers are still not aware of the benefits of merit goods and demand may not increase as much. Furthermore, if the government stop subsidising merit goods, consumption will automatically fall again. There is also no guarantee that education campaigns will be successful and this method may be costly.

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Mark scheme ♕
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For analysis
• of any method of increasing the provision of merit goods such as direct provision or subsidies explaining the strengths and weaknesses of each approach selected
(Up to 6 marks for each method)

(8 marks maximum)

For evaluation that assesses and compares
• the relative strengths and weaknesses of each approach (3 marks)
• to reach a conclusion concerning which policy is more likely to be effective (1 mark)

(4 marks maximum)

A number of methods are used to increase the supply of merit goods in a mixed economy. These include direct provision, producer subsidies and education campaigns to increase the demand for the merit good. Each has advantages and disadvantages based Upon for example, the cost of provision, the time period under consideration and the difficulty in implementation. The mark scheme indicates that candidates need to explain two methods to obtain full marks for the analysis. This should include the strengths and weaknesses of each approach. They then need to provide evaluative comment to reach a conclusion on which method is likely to be most effective.

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