34 Merit Goods and Services

Topics: Economics, Externality, Welfare economics Pages: 3 (846 words) Published: July 10, 2013
Merit Goods and Services
Merit goods are those goods and services that the government feels that people will underconsume, 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. • • • 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 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 and students. Costs Benefits



Welfare loss because merit goods tend to be under-consumed by the A free market

External Benefit B

C

Supply = Private Marginal Cost

Social Marginal Benefit Private Marginal Benefit Qp Qs Output (Q)

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. 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 including rising incomes and productivity for current and future generations; an increase in the occupational mobility...
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