Which policy action would governments typically use to raise the consumption of merit goods?

• A. Tax them
• B. Prohibit them
• C. Subsidize them
• D. Set price controls

Answer: (C)

Merit goods tend to bring larger social benefits than private benefits, so people may under-consume them because they don’t fully recognise the wider value or face barriers to access. A subsidy directly lowers the price that consumers pay (or boosts producers’ revenue), making the good cheaper and encouraging more people to buy it. By reducing the out-of-pocket cost, consumption rises toward the socially optimal level where the additional private benefit aligns more closely with the total benefit to society. This is why governments commonly subsidize merit goods such as education and healthcare.

Taxing merit goods, prohibiting them, or using price controls are not aimed at increasing consumption. Taxes would reduce it, prohibiting would eliminate it, and price controls (like price floors or ceilings) are not primarily tools to boost uptake of goods with positive externalities.