Merit Goods and Information Failure

Steps:

• Identify merit goods as items with positive externalities where social benefits exceed private benefits.
• Recognize that consumers undervalue merit goods due to imperfect information, leading to underconsumption.
• Apply to education: individuals may not fully appreciate long-term benefits like higher earnings or societal gains.
• Conclude government intervenes via subsidies or provision to correct underprovision and maximize social welfare.

Why D is correct:

• Merit goods definition includes information failure, where consumers underestimate benefits, justifying intervention to ensure optimal consumption.

Why the others are wrong:

• A: Focuses on affordability, not the inherent undervaluation central to merit goods.
• B: Irrelevant comparison of school types; intervention targets market failure, not quality differences.
• C: Incorrect, as merit goods have social benefits exceeding costs, prompting intervention.

Final answer: D