Merit Goods

@PhilsEconomics
 Merit Goods
• Goods and services that will be under-consumed in a
free market as individuals do not fully perceive the
benefits obtained from consumption
• This is due to information failure
• Some of these can produce positive externalities also
• Examples include education, health care and
insurance ( pensions, sickness insurance)
• Think for a couple of minutes about why these tend
to be under-consumed and why this is bad……
Correcting The Under Consumption of Merit
Goods
• Merit goods are
controversial
• This is because of large
private benefits
• Who benefits directly
from health care and
education?
• The sick and students –
Why should I pay?
Correcting The Under Consumption of Merit
Goods
Governments can attempt to provide merit
goods in a number of ways:
• Direct Provision – Goods and services are
provided to the consumer free of charge
• Subsidised Provision – The Government pays
part of the cost
• Regulation – Left to the market, but
consumers are forced to buy it
• Think of examples of each
 Direct Provision
Advantage:
• Govt directly controls the supply
• Not only quantity, but also quality
Disadvantages:
• Productively Inefficient – What is the incentive to
Govt employees to minimise costs?
• Allocatively Inefficient – How do we balance
soldiers v hospital beds?
• Expensive
 Subsidies
• Help those on low
incomes to afford to
buy goods
• Does the consumer
always benefit?
• Difficult to judge the
size of the subsidy
needed
 Regulation
• Takes little or no taxpayer’s money
• Consumers are likely to shop around for the
best price, best value, ensuring Productive and
Allocative Efficiency
• Can disadvantage the poor. Eg America’s
Health System
• Can be ignored