Are you supposed to use Lanterns as a light source? I picked one up but cant seem to equip it like you do with a Torch. Or is it just filler/merchant junk?

Just junk. Like 90% of the items so far.

You can't

Bring back Morrowind's use of lanterns, please. They were awesome.

Yeah, they're just filler. At least we can pick them up in this game though. Maybe by the time TES 6 rolls around we'll have come full circle and they'll be light sources again.