Why do governments often provide merit goods below market price?

Governments often provide merit goods below market price to ensure accessibility and promote social welfare.

Merit goods, such as education, healthcare, and public transportation, are goods that society deems valuable and beneficial for individuals and the community as a whole. They are often under-consumed if left to the free market due to their nature of being non-excludable and non-rivalrous, meaning they are available to all regardless of whether they pay for them or not. Therefore, governments step in to subsidise these goods, providing them at a lower cost or even free of charge, to ensure that everyone, regardless of their income level, can access them.

The provision of merit goods at below market price is a form of market intervention by the government. This is done to correct market failures, where the market on its own does not allocate resources efficiently. In the case of merit goods, the market tends to under-provide these goods as private firms may not find it profitable due to the inability to exclude non-payers. By providing these goods at a lower price, the government can increase consumption to a level that is socially optimal.

Moreover, providing merit goods at a lower price also promotes social welfare and equity. Merit goods often have positive externalities, which are benefits to society that are not reflected in the market price. For example, an educated population can lead to a more productive workforce, which benefits the economy as a whole. By making these goods more affordable, the government can ensure that these positive externalities are maximised.

Furthermore, the provision of merit goods at below market price can also help to reduce income inequality. By ensuring that essential goods and services like education and healthcare are affordable for all, the government can help to level the playing field and provide everyone with the opportunity to improve their standard of living.

IB Economics Tutor Summary: Governments provide merit goods like education and healthcare below market price to ensure everyone can access them, regardless of income. This intervention corrects market failures, boosts social welfare by increasing consumption of beneficial services, and helps reduce income inequality by levelling opportunities. It also maximises the societal benefits that arise from these goods.