Merit goods and services create positive externalities when consumed and these 3rd party spill over benefits can have a significant effect on social welfare. Market failure occurs when merit goods and services are under-consumed under free market conditions.

Policy intervention can help either through offering financial incentives (e.g. consumer or producer subsidies) or through behavioural nudges and information campaigns designed to change our choices.

What are the key differences between a merit good and a public good?

Who provides 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.
• 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 merit goods and services. Individuals may not act in their own interest because of imperfect information.

What are some good examples of merit goods?

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

Education as a merit good

• 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 happen. Education provides external benefits including rising incomes and productivity for current and future generations and an increase in occupational mobility to 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?

1. To encourage consumption so that positive externalities of merit goods can be achieved for example free inoculation against infectious diseases
2. To overcome the information failures linked to merit goods
3. 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