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.

─────────────────────
Step ➌ : Discuss why these policies are not always effective.
─────────────────────

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.

──────────────────────
Step ➍ : Discuss which policy is most effective.
──────────────────────

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.

────────────────
Mark scheme ♕
────────────────

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.