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Merit and non-merit goods

Merit goods

A merit good is a good that would be underprovided by the market mechanism, which is an example of a market failure. There are two explanations for why this might be. (1) The value of the good is not fully understood by consumers at the time at which they purchase it. For example, health provision. Health provision has to be paid for mainly by people who are young and healthy; they reap the benefit of it in thirty or more years' time, when they are older and less fit. It is difficult for people who are young and healthy to appreciate the need for health care, and if the provision of health was left to market forces alone, there would not be enough of it. In this case the failure of the market mechanism to provide the “right” level of service is regarded as an information failure. (2) The government (or some other body) decides that an item or service is good for you independently of the satisfaction the consumer derives from it. It is like a child taking a cod-liver oil tablet to ward off illness. The child dislikes it, but the parents force it down his throat nonetheless in the child's best interests!

Education is another example of a merit good. The benefits from good education to the child who receives it are considerable; poor education resulting in illiteracy could be a real burden on society as a whole. However, if left to the market mechanism alone, the people who would have to pay for the education would be the parents of the children. In some cases, parents would not accept or understand the nature of the responsibility and education would as a result be underprovided. Furthermore, even if the child could pay for it, being a child he might not understand its benefits. Therefore, it seems right that the state should intervene to provide education.

The distinction between public and merit goods

A public good is one that is non-excludable and non-rivalrous, and hence, a good for which no demand schedule exists. Hence, there can be no market in a public good. An example is defence.

Non-rivalrous means that the additional consumption of the good adds nothing to costs. For example, when a new born baby is born, this adds nothing to the cost of the defence of the realm.

Non-exclusion means that it is not practical to exclude non-payers from the benefit of producing the good. For example, if defence is provided, everyone benefits regardless of who pays.

A merit good is a good that someone deems to be good for someone else in a way that is not expressed by the immediate utility that the good provides; in other words, its good for you regardless of how much satisfaction you derive from it at the time. An example of a merit good is education. Education is both rivalrous and excludable; that is, it does cost something more to provide one more place at a school, and it is possible to exclude people from schools. People derive satisfaction from education and are prepared to pay for it.

Nonetheless, there are benefits from education, and the reasons why it is a merit good as well as a private good are discussed above.

Should the government provide merit goods?

Whether governments should provide merit goods is a matter of debate. The provision of goods on the grounds that they are “good for you” is related to paternalism. That is to say, the state, acting in the role of a parent, determines that it is good for the public to have a merit good, regardless of whether the public say they want to pay for it or not. In the past the government did legislate in this way, and assumed that it had the right to dictate to the people on many issues of what is good for them. But we live in a “democracy” and expect our government to express our wishes, and expect to be able to determine for ourselves what is good for us. In practice, however, the government still does assume some right to dictate to the people what shall be good for them. The examples of health care and education show that this is not unreasonable. Indeed, the government does genuinely have to act as the “parent” towards children where their own parents fail them — for example, as a result of child abuse. The theory that those in government know best and have access to expert knowledge, foresight and higher moral principles is not entirely rejected. People have a chance to check any abuse of power and heavy handed paternalism through the democratic process. Nonetheless, this is a matter of considerable debate.