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Merit goods and services

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.

Both the state and private sector provide merit goods & services. We have an independent education system and people can buy private health care insurance.

Consumption of merit goods is believed often to generate positive externalities- where the social benefit from consumption exceeds the private benefit.

A merit good is a product that society values and judges that people should have regardless of their ability to pay. In this sense, the government is acting paternally in providing these merit goods and services. They believe that individuals may not act in their own best interest in part because of imperfect information.

Good examples of merit goods include health services, education, work training programmes, public libraries, Citizen's Advice Bureaux and inoculations for children

merit goods

Education as a merit good

The argument concerning imperfect information is an important one here. Parents may be unaware of the longer-term benefits that their children might derive from education.

Education is a long-term investment decision. The private costs must be paid now but the private benefits (including higher earnings potential over one’s working life) take time to emerge. Education should provide a number of external benefits including rising incomes and productivity for current and future generations; an increase in the occupational mobility of the labour force which should help to reduce unemployment.

Increased spending on education should also provide a stimulus for higher-level research which can add to the long run trend rate of growth. Other external benefits might include the encouragement of a more enlightened and cultured society. Providing that the education system provides a sufficiently good education across all regions and sections of society, increased education and training spending should also open up more equality of opportunity.

Notice here that we are talking about the sorts of goods and services that society judges to be in our best welfare. Judgements involve subjective opinions – and we cannot escape from making value judgements when we are discussing merit goods.

Why does the government provide merit goods and services?

  • To encourage consumption so that positive externalities of merit goods can be achieved for example free inoculation against infectious diseases
  • To overcome the information failures linked to merit goods
  • On grounds of equity – because the government believes that consumption should not be based solely on the grounds of ability to pay for a good or service

Comparing and contrasting merit goods with pure public goods

Merit Goods

Pure Public Goods

Provided by both the public and private sector

Normally funded & provided by the government

Positive marginal cost to supply to extra users

Marginal cost of supply close to zero – if provided to one, it is provided to all

Limited in supply – may be a high opportunity cost

Largely unconstrained in supply

Rival – consumption reduces availability for other

Non-rival – one person’s consumption does not reduce availability for others

Excludable

Non-excludable giving rise to the free rider

Rejectable by those unwilling to pay

Non rejectable  - usually funded by general taxes





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