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Merit goods create a divergence between the private and social costs and benefits of production and consumption leading to the risk of market failure. Risk of under-consumption: Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or perhaps provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service. Who provides merit goods? It is important to realise that it is not simply the government (or public sector) that supplies merit goods. Both the state and private sector provide merit goods & services. We have an independent education system and people can buy private health care insurance. Externality issues: Consumption of merit goods is believed to generate positive externalities- where the social benefit from consumption exceeds the private benefit. Merit goods – museums and libraries
Merit goods can be defined in terms of their externality effects and also in terms of informational problems facing the consumer A merit good is a product that society values and judges that everyone should have regardless of whether an individual wants them. In this sense, the government (or state) is acting paternally in providing merit goods and services. They believe that individuals may not act in their own best interest in part because of imperfect information about the benefits that can be derived. Good examples of merit goods include health services, education, work training programmes, public libraries, Citizen's Advice Bureaux and inoculations for children and students. 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 some valued judgements when we are analysing and discussing merit goods.
Education as a merit good Exclusive schooling Education is provided by the state and the private sector – but if it was left only to be fee-paying sector, education would be heavily under-consumed
The argument concerning imperfect information is an important one. Parents with relatively poor educational qualifications may be unaware of the full longer-term benefits that their children might derive from a proper education. Because the knowledge of these private benefits is an ongoing learning process, children themselves will tend to underestimate the long term gains from a proper 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 that might not be taken into account by the free market. These include 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 and therefore reduce welfare spending. 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, less prone to political instabilities and one which manages to achieve a greater degree of social cohesion. 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 a higher level of equality of opportunity. The reality is of course that there are very deep and wide variations in educational performance and opportunities across the country. School milk – should it be subsidised? Economists working as consultants for London Economics have written a paper arguing that the Government should consider ending the current milk subsidy scheme for 1.2 million primary school children in England as they cost too much to administer and do little to improve health. They found that administration costs took up 70 per cent of the total cost of running the milk scheme and that the money could be better spent on alternative projects. The subsidy payable on whole milk is about 19p per litre or 11p per pint and the subsidy payable on semi-skimmed milk is about 15p per litre or 9p per pint. Abandoning the payments to 15,000 schools and local education authorities in England would save £1.5 million a year. The subsidy is already set to be cut by 16 per cent up to July 2007 as part of Common Agricultural Policy reform. In their report the London Economics consultants argue that "The private sector already offers milk at a low price, so it is not clear why schools should offer it also. While many products are helpful for children - such as toothpaste and toothbrushes - schools do not typically offer them for sale to pupils." But Milk for Schools, a campaign funded by the dairy industry, says the subsidy should be extended, not dropped. A spokesman said that "School milk schemes are essential to ensure access to nutrition for all and that the scheme was important as a way of alleviating child poverty." Jim Begg, Director General of Dairy UK, said: “This subsidy is highly valued by parents, teachers and schools as a method of delivering the nutritional benefits of milk to children. If the Government chose to reduce or scrap this subsidy the effect will be most acutely felt by the neediest and it is highly unlikely that the money would be re-directed to other nutritional programmes.” Source: Dairy UK, Milk for Schools Brain food – is it a new merit good? Tucking into an oily fish as such sardine, salmon or mackerel may be the way that people can consumer sufficient fatty acids. But should the government provide a subsidy for schools to give their students multivitamin pills and omega-3 supplements in a bid to improve educational performance? The use of supplements as brain food is an interesting example of a paternalistic approach to improving education results. Some trials have found that omega-3 supplements can enhance learning abilities and relieve depression. Omega-3 is termed an "essential fat", found in oily fish. The claim is that such foods are under-consumed by children (and adults) in a world dominated by convenience foods with many of the important minerals and vitamins stripped away by the food processing industry. Naturally there are plenty of skeptics ready to line up and question not only the benefits of such supplements but also the cost. The retail price is estimated to be 40p to £1.20 a day per student for the recommended dose of half a gram. Might that money be better spent elsewhere for example in increased funding for school libraries or ICT equipment? Source: Adapted from news reports, June 2006 So why does the government provide merit goods and services?
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| Author: Geoff Riley, Eton College, September 2006 |
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