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Economics explained


Market failure

Merit good-Positive consumption externalities

Merit good-Positive consumption externalities

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Positive consumption externalities are the spillover effects of consumption of a good or service on others.

When a person consumes a merit good, the resulting positive externality benefits other people.

When people travel by train rather than by car, other people benefit by there being less congestion and exhaust and fewer accidents on the roads. Thus the marginal social benefit of rail travel is greater than the marginal private benefit.

The equilibrium without government intervention is where MPC = MPB or D1 = S1.

The marginal external benefit (MEB) represents the positive externalities generated by train travel such as less congestion. The MEB is added to the MPB curve to give the MSB, the marginal social benefit.

The privately optimal level of train travel is at Q1 where MPC=MPB. The socially optimum level of train travel is where MSC=MSB at Q2.

Free market provision of merit goods leads to underconsumption.

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