ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Definition. A merit good can be defined as a good which would be under-consumed (and under-produced) by a free market economy, due to two main reasons: When consumed, a merit good creates positive externalities (an externality being a third party/spill-over effect of the consumption or production of the good/service).

Detailed explanation-2: -A good may be classed as a merit good if it causes positive externalities. Education is typically cited as an example. In the absence of government intervention individual choice will lead to under-consumption of a good causing a positive externality.

Detailed explanation-3: -A positive externality is a benefit of producing or consuming a product. For example, education is a positive externality of school because people learn and develop skills for careers and their lives.

Detailed explanation-4: -Public goods have positive externalities, like police protection or public health funding. Not all goods and services with positive externalities, however, are public goods. Investments in education have huge positive spillovers but can be provided by a private company.

Detailed explanation-5: -Answer and Explanation: Flowers in your neighbor’s front yard is a perfect example of a positive externality.