What are merit goods and why do they represent an example of market failure?

Merit goods are products and services which have positive externalities and thus have a positive impact on society. For example, fruits and vegetables which not only have a private benefit to the consumer but also to society through reducing pressure on the NHS (through creating a healthier population). Other examples include higher education and public transport. These goods are, however, often are provided at a quantity below the socially optimum level thus creating market failure as there is a misallocation of resources. This is due to the fact that the socially optimum level of consumption occurs when the private benefit is equal to the social benefit. However, many people do not consider the social benefit when buying goods and services and only consider the private benefit. In the example of fruit and veg there is an information gap as consumers are only aware of the private benefits of eating healthy and do not consider the benefits to society - thus causing an underconsumption of the merit good and hence market failure.

Answered by Alice R. Economics tutor

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