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.