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Economics explained


Market failure

Government intervention and positive consumption externalities

Government intervention and positive consumption externalities

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Providing information

Information is also provided by governments to persuade consumers to buy more goods that produce positive externalities. In most developed economies, people are urged to eat more fruit and vegetables to reduce the possible risk of health problems such as diabetes and obesity.


If the government subsidises a merit good, such as train travel, then the supply curve shifts to the right from S1, which equals MPC, to S2, which equals MPC plus the subsidy.

The marginal cost of supplying the good is reduced by the amount of subsidy.

As a result, there will be an increase in the quantity produced to Q2 and a lower price at P3. At the subsidised price, consumption of train travel rises to the socially optimum level of Q2. Allocative efficiency is now being achieved.

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