What are merit goods characterized by?

Merit goods are characterized by underproduction by the market due to their positive externalities and the tendency for individuals to undervalue their benefits. These goods are typically underprovided in a free market because consumers may not fully appreciate or be aware of their benefits, leading to a lower demand than what would be socially optimal. As a result, the market fails to produce enough merit goods to meet the actual societal need or potential consumer welfare.

For instance, goods such as education and healthcare are considered merit goods because they generate benefits not only for the individuals receiving them but also for society at large, such as a more educated workforce and healthier populations. Since the market may not capture these broader positive impacts, government intervention often occurs to encourage the production and consumption of merit goods.

Other options reflect different economic situations. Overproduction would suggest that the market is generating more of a good than is socially optimal, which does not describe merit goods. A high market price can discourage consumption and is not a characteristic specific to merit goods; similarly, negative externalities are associated with demerit goods rather than merit goods.