Why Might Merit Goods Be Under-Consumed If Left to the Market

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Examlex · Accepted Answer

The Answer is Merit goods maybe under-consumed because consumers may have imperfect information about the benefits of these goods and are not able to value them appropriately as a result. They also make decisions only based on the private benefit and not the social benefit. If the market signal does not fully convey the value of the benefits to consumers then they are likely to under invest in these goods. For example sacrificing a job now for studying a degree is made in the belief that it will provide a greater future benefit in both income and through having more rewarding jobs, but that is in the future and its exact nature is not specific. The information to base this decision on is imperfect. Also the social benefit of gaining a degree is ignored when making a decision because the consumer is only interested in the private benefit from education. This social benefit of adding to the human capital of the country is important to the government and hence a government may subsidise higher education or offer loans that will be repayable from future incomes.

Why Might Merit Goods Be Under-Consumed If Left to the Market

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