Why might a government subsidize education or healthcare?

• A. To reduce access for disadvantaged groups.
• B. Because of negative externalities and merit goods; subsidies increase costs for users.
• C. Because of positive externalities and merit-good characteristics; subsidies increase access, productivity, and long-run welfare.
• D. To decrease overall welfare.

Answer: (C)

Subsidizing education or healthcare rests on the idea that these services generate benefits beyond the person who uses them. They are merit goods with positive externalities: when more people are educated or healthier, society as a whole gains through a more productive workforce, lower crime, and better long-run welfare.

Because of these positive externalities and the merit-good nature, the market on its own may underprovide these services. A government subsidy lowers the price for users, making education and healthcare more affordable and accessible. That expanded access means more people can benefit, which boosts productivity and contributes to longer-term welfare for the economy.

The other statements don’t fit this logic. Subsidies are not intended to reduce access; they are designed to increase it. They also lower, not raise, the cost to users, since the subsidy helps pay part of the price. And the aim isn’t to decrease welfare but to improve it by enhancing education, health, and the associated benefits for society.