Figure 1
Many economists believe that government spending should continue to be used to provide healthcare. This helps solve a potential market failure because healthcare generates positive externalities. Without government intervention, healthcare may not be provided in sufficient quantities. In the UK, the government provides healthcare mainly free of charge to all UK citizens. This is expensive, with over £100 billion spent by the government in 2019 on healthcare – which in 2020 and beyond will rise significantly due to the COVID-19 pandemic.

Using Figure 1, analyse how the government might correct the market failure caused by healthcare not being provided in sufficient quantities.

The market failure identified is the under-provision of healthcare, which is a merit good that generates positive externalities. This means the social benefit of healthcare is greater than the private benefit. In a free market, individuals would only consume up to the point where their private benefit equals the price, leading to under-consumption and under-provision from society's point of view. The government corrects this by intervening in the market. As stated in Figure 1, the UK government 'provides healthcare mainly free of charge'. This direct provision ensures that healthcare is available to everyone, regardless of their ability to pay. By funding healthcare through general taxation (over £100 billion in 2019), the government increases the quantity supplied and consumed to a level closer to the socially optimal amount. This helps to internalise the positive externalities, such as a healthier, more productive workforce and reduced spread of communicable diseases, benefiting society as a whole, not just the individual receiving care.