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.

Healthcare is considered a merit good, which means it provides greater benefits to society than the individual consumer may realise. These wider benefits are called positive externalities. For example, vaccinations not only protect the individual but also help create herd immunity, protecting the entire community. Because individuals in a free market only consider their private benefits, they would demand less healthcare than is socially optimal. This leads to under-consumption and under-provision, which is a market failure. The government intervenes to correct this. As the text states, it directly provides healthcare, funding it through taxation. This removes the price barrier for consumers, increasing consumption to a level that accounts for the positive externalities and is closer to the socially desirable level, thus correcting the market failure.