Explain why the under-consumption of merit goods causes market failure.

Discuss whether there should always be direct provision of public goods by the government.

Answers may include:

• definitions of merit goods and market failure
• a diagram to show the under-consumption and under-production of merit goods
• explanation of how the under-consumption of merit goods and the presence of positive externalities leads to market failure
• examples of merit goods.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of a public good
• diagrams to show market failure and the associated welfare loss may be used but no diagram is necessarily expected
• distinction between a private good and a public good. Explanation of why market failure is likely to occur in the case of public goods, with reference to the free rider problem. Rivalry and excludability. Explanation of why public goods are often provided directly by the government
• examples of public goods
• synthesis or evaluation (discuss).

Discussion may include: an evaluation of whether public goods should always be directly provided by the government in terms of possible alternatives and the possible problems of direct provision, eg the opportunity cost, political conflict and possible benefits, eg economies of scale. Candidates may also discuss the possible creation of government debt to finance public goods, consideration of what the social benefits might be, the difficulty of measurement of such benefits and, therefore, the prospect of a misallocation of resources since government will not necessarily accurately assess need.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.

This was a very popular question and candidates were generally comfortable explaining why the under-consumption of merit goods causes market failure. The examples they used however tended to be rather generic and there were few effective attempts to develop examples in the context of the question. Areas of loss or potential gain in diagrams were often not correctly indicated.

High achieving responses were able to precisely define public goods and offer meaningful examples. However, a significant number of candidates were unable to clearly explain what they are. There was a tendency by some to describe merit goods instead. The higher achieving responses contained valid discussions of market failure, missing markets and the role of the state. This question proved to be a strong indicator of candidate achievement. There was no expectation that a diagram be provided for this question although there were some very imaginative efforts on display. Not all questions automatically suggest an appropriate diagram.