Merit goods are goods and services where the social benefits exceed the
private benefits. Merit goods
are underprovided by the market mechanism, as individuals donít take into
account the positive externalities that arise from consumption.
This will lead to the market equilibrium quantity being lower than the
One reason for the underprovision is that individuals find it difficult
to make rational choices when the costs arise today and the benefits are only
received in the future. Healthcare
and pensions are two examples of merit goods where money has to be spent (or
saved) today, but the benefits arenít reaped for a number of years.
Empirical evidence has suggested that if left to market forces young
people wouldnít make the necessary provisions for sickness or unemployment
(retirement) in old age. Young
people tend to be healthy and in work therefore they find it difficult to
appreciate that on day they will be ill and out of work.
The cost of healthcare and pensions are so great that you could only
afford them if you start saving at a young age. It therefore makes sense for the government to intervene and
force individuals to make contributions that will safeguard them against
illness and retirement.
The beneficiary of the education will often not be
the person who has to pay for it. This could lead to a conflict of interests
as parents may wish to minimise their expenditure on education, whilst it
would be in the childís best interests to receive the highest quality of
education available. In addition
to the external benefits the child/student will gain society as a whole will
also be better off. Somebody who
is unable to read or write could be deemed as a burden on society as they
would more than likely need supporting, whereas an educated individual would
contribute to the welfare of the nation.
This leads to the
case for some form of government intervention to encourage increased
consumption of merit goods. It
might take the form of an explicit government subsidy to reduce the private
costs of consumption and cause an expansion of demand.
Higher government spending on these merit goods should yield a
positive social rate of return which leads to an improvement in total