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

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?

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 – a key summary

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 – 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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