Suggested Answers of BT2 Revision Package - ASKnLearn

Cost/BenefitMPC = MSCEE 2MSBMPB0Q 1Q sFigure 1QuantityMerit Goods- Individuals may not act in their own best interests because of imperfect information about the benefits that can be derived from the consumption of merit good like museums and art performances. - Merit goods are those goods and services that the government thinks are “beneficial” for the individual consuming them as individuals are likely to underestimate their personal benefits in consuming merit goods. - Left wholly to the private sector, merit goods will be under-­‐consumed because individuals do not understand or appreciate the good effects (that can be seen only in the long term) The above shows allocative inefficiency under an unregulated free mkt system. Marketfailure results. Thus, govt intervention may be necessary to reduce the allocativeinefficiency.Explanation of how subsidy works to correct the market failureA subsidy is a payment made either to a firm or to a consumer when the firm produces orwhen the consumer buys a good or service.- Can be used to correct the problem of positive externalities and merit goods.