Explain why the consumption of merit goods, such as healthy food, can lead to positive externalities of consumption.

Discuss whether advertising by the government is the most appropriate way of increasing consumption of a merit good.

Answers may include:

• definitions of positive externalities, merit goods
• diagram(s) to show the positive externality of consumption
• explanation of how healthy food will be under-consumed in a competitive market because the MSB is greater than the MPB (can use any example of a merit good)
• examples of where the consumption of merit goods has led to positive externalities.

Award a maximum of level 2 if there is no illustration of the types of positive externalities that could occur with the merit good described, for example, less government spending on health care.

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

Answers may include:

• definitions of advertising and merit good
• diagram(s) to show the effect of advertising and other alternatives to advertising
• explanation of how advertising will shift the demand curve (MPB) towards the MSB curve
• examples of specific policies governments have used
• synthesis or evaluation (discuss).

Discussion may include: whether advertising will influence demand, other factors that influence the demand for merit goods, alternatives to advertising like subsidies, legislation and direct provision.

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