Introduction
A positive externality of consumption arises when consuming a good confers benefits on third parties who are not part of the transaction, so that the marginal social benefit (MSB) of consumption exceeds the marginal private benefit (MPB) enjoyed by the individual consumer. A merit good is a good that is better for the consumer, and often for society, than the consumer realises, so it is under-consumed when left to the market; vaccination, education and preventive health care are the standard cases, valued too little both because the consumer ignores the spillover benefit to others and because they undervalue even their own private gain. This answer evaluates the main government responses to these problems, subsidies, direct provision, and education or awareness, and argues that the best response depends on the size of the external benefit and on why the good is under-consumed.
The market failure
Left alone, consumers decide how much to buy by weighing their private benefit against the price, so the market settles where MPB meets supply, at a free-market quantity. But the socially optimal quantity is where MSB meets marginal social cost, and because MSB lies above MPB, the social optimum is larger than the market quantity. The good is under-consumed and under-provided. For every unit between the market quantity and the social optimum, the benefit to society exceeds the cost, so these units would raise welfare but are never produced, and the foregone net social benefit over that range is the welfare loss. That loss is the case for intervening.
Subsidies
A subsidy is a per-unit payment to producers that lowers their costs, shifts the supply curve down by the subsidy, lowers the price consumers pay and raises the quantity consumed towards the social optimum. If the subsidy is set equal to the marginal external benefit at the optimum, it internalises the externality and restores allocative efficiency. Many governments subsidise childhood vaccination so heavily that it is free at the point of use; because an immunised child protects others by reducing transmission, the external benefit is large, and a subsidy that raises take-up close to the level needed for herd immunity can deliver a social gain far larger than its fiscal cost.
Evaluation. The decisive weakness is information and cost. Governments rarely know the exact value of the marginal external benefit, so the subsidy is likely to be set too high or too low. A subsidy is funded from taxation, so it carries an opportunity cost, and where demand for the good is price inelastic a large subsidy may be needed to raise consumption much, which is expensive. A subsidy also works through price, so it does little when the under-consumption stems from ignorance or habit rather than from price.
Direct provision
The government can instead provide the merit good itself, free or below cost, as with state schooling and public health clinics. Direct provision guarantees the quantity rather than relying on the market to respond to a price signal, and it can target access at exactly the groups who consume too little. Free compulsory secondary education is the developed example: by removing both the price barrier and, through compulsion, the choice to opt out, many countries have driven enrolment far above the level a price subsidy alone would reach, capturing the large external benefits of a more skilled and productive population.
Evaluation. Direct provision is costly and can be productively inefficient, because a state provider lacks the discipline of competition and may deliver poor quality or long waiting times. It also requires the government to judge how much to provide, the same information problem as the subsidy. Where the state crowds out private provision, the net gain in consumption can be smaller than it looks.
Education and awareness
Where the good is under-consumed because people undervalue its private and social benefit, the most direct fix is to change the valuation itself through education, advertising and public-information campaigns. A campaign that persuades parents of the safety and benefit of vaccination shifts the demand curve to the right, raising consumption at any price. This addresses the root cause when the problem is information rather than price, and it is usually cheaper than a large subsidy.
Evaluation. Awareness campaigns are slow, their effect is hard to measure, and they can be swamped by misinformation, as falling vaccination rates in some high-income countries after online anti-vaccine campaigns show. They change behaviour only at the margin and rarely close the whole gap on their own.
Evaluation and judgement
Each policy has a natural home. A subsidy suits a merit good that is under-consumed mainly because of price, where the external benefit can be roughly valued and consumers respond to a cheaper price. Direct provision suits a good with a very large external benefit that society wants guaranteed for everyone, such as basic education, and where access matters more than choice. Education and awareness suit a good under-consumed because people undervalue it, where the binding constraint is information rather than money. Two threads decide the verdict. First, the size of the external benefit sets how much intervention is worth: a large spillover, as with vaccination, justifies aggressive action, while a small one may not. Second, the reason for under-consumption dictates the tool: price-based under-consumption calls for a subsidy, ignorance calls for information, and a desire to guarantee universal access calls for provision. The supported judgement is that the strongest response is usually a considered combination matched to those two factors, free or subsidised provision of the good paired with education that raises its perceived value, rather than any single instrument used alone.