Merit Goods: The Social Side of Spending
What Makes a Good "Meritorious"?
Imagine you have $10. You could buy a video game or pay for a doctor's check-up. The free market[2] lets you choose. But what if you choose the game every time, not realizing how important the check-up is for your long-term health? This is the core idea behind merit goods. They have two main characteristics:
First, they create positive externalities. This is a fancy term for "good side effects." When you consume a merit good, benefits spill over to other people. For example, when you get vaccinated, you protect not just yourself but also your classmates and community by helping stop the spread of disease. Society as a whole is better off.
Second, there is often a difference between what individuals want in the short term and what is actually good for them in the long term. Governments and experts argue that people might undervalue merit goods due to:
- Imperfect Information: Not knowing the full, long-term benefits (e.g., not understanding how early education boosts lifetime earnings).
- Immediate Costs vs. Future Benefits: The benefit (like good health in old age) is far in the future, while the cost (gym membership, healthy food) is now.
- Inability to Pay (Lack of Income): Someone might value education highly but simply cannot afford tuition fees.
Merit Goods vs. Public Goods and Demerit Goods
It's easy to mix up merit goods with other economic terms. Let's clarify the key differences.
| Type of Good | Key Feature | Example | Government's Typical Action |
|---|---|---|---|
| Merit Good | Under-consumed; socially desirable; positive externalities. | Education, Vaccinations, Libraries, Museums. | Subsidize, provide for free, or mandate consumption. |
| Public Good | Non-excludable and non-rivalrous. One person's use doesn't reduce availability for others. | National Defense, Street Lighting, Public Parks. | Almost always provide directly, funded by taxes. |
| Demerit Good | Over-consumed; socially undesirable; negative externalities. | Cigarettes, Alcohol, Junk Food (in excess). | Tax heavily, regulate advertising, or ban. |
Notice that a merit good can be a private good (like a visit to the dentist) that is rivalrous and excludable. The "merit" label comes from its social value, not its technical economic characteristics.
The Math Behind Under-Consumption
Why does the free market fail to provide the right amount of merit goods? We can think of it using a simple economic model with two types of demand.
1. Private Benefit (PB) Demand: This is the demand based only on the value an individual places on the good. It's what we see in the free market.
2. Social Benefit (SB) Demand: This is the demand that includes all benefits—the private benefit to the individual plus the positive externalities enjoyed by society.
Because merit goods create positive externalities, the Social Benefit is always greater than the Private Benefit:
$ SB = PB + Positive\ Externalities $
In a supply and demand graph, the SB demand curve lies to the right of the PB demand curve. The free market, responding only to private demand, settles at a lower quantity ($Q_{market}$) and a certain price. However, the socially optimal point—where society's total welfare is maximized—is at a higher quantity ($Q_{optimal}$). The gap between $Q_{optimal}$ and $Q_{market}$ is the under-consumption.
Governments to the Rescue: Fixing the Market
Governments don't just identify the problem; they actively try to solve it. Their main goal is to close the gap between private and social demand, moving consumption from $Q_{market}$ to $Q_{optimal}$. They have a toolkit of policies to do this:
1. Subsidies: This is a direct financial boost. The government pays part of the cost, lowering the price for the consumer. For example, a government might give money to a farmer to grow healthy vegetables, making them cheaper in stores, or give a grant to a family to help pay for college tuition. The lower price encourages more people to buy the merit good.
2. Direct Public Provision: The government provides the good or service itself, often for free or at a very low cost. Public schools, state-run hospitals and clinics, public libraries, and national museums are classic examples. This removes the price barrier completely for basic levels of consumption.
3. Regulation and Mandates: The government makes consumption compulsory. Laws requiring children to attend school up to a certain age or mandating specific vaccinations for entry into public schools are clear examples. This directly overrules individual under-consumption decisions.
4. Public Information Campaigns: To tackle imperfect information, governments run ads and educational programs. Campaigns promoting the benefits of eating five fruits and vegetables a day, quitting smoking, or getting a flu shot aim to shift private demand closer to social demand by informing people.
Merit Goods in Your Daily Life
Let's look at concrete examples you encounter all the time. Each shows how the market might fail and how intervention works.
Example 1: Education (K-12 and University)
In a pure free market, education would be sold like any other service. High-quality schools would be expensive. Some families couldn't afford them, and others might decide to spend their money on immediate needs instead, not fully grasping how much more a graduate earns over a lifetime. This leads to under-consumption of education. Society loses out on a more productive, innovative, and informed citizenry. The fix? Free public K-12 education (public provision), subsidized student loans and grants for university (subsidies), and compulsory attendance laws (regulation).
Example 2: Preventive Healthcare and Vaccinations
A yearly dental check-up or a flu shot costs money and time now, while the major benefit (avoiding a painful cavity or getting sick) might not be felt immediately. People might skip it. But if too many skip vaccinations, herd immunity breaks down and diseases spread, creating huge social costs. The fix? Public health clinics offering low-cost services (public provision), health insurance mandates that cover preventive care (regulation/subsidy), and mandatory vaccination schedules for schools (regulation).
Example 3: Public Libraries and Cultural Institutions
Could a free market provide libraries? Possibly, but they would likely charge membership fees, reducing access for lower-income individuals. Society values an informed public and access to culture beyond what individuals are willing to pay for. The knowledge gained from a library book can lead to innovation and better civic participation—positive externalities. The fix? Municipal libraries funded by taxes (public provision).
Important Questions
Q1: Who decides what counts as a merit good? Isn't that subjective?
This is an excellent point and a major debate in economics and politics. There is no perfect scientific formula. Generally, it's a democratic and social decision. Governments, informed by experts in public health, education, and economics, propose policies. Elected representatives vote on them, and courts may review them. While most agree on basics like elementary education and vaccines, other areas (like whether opera should be publicly funded) can be controversial. The label "merit good" implies a societal consensus that has been reached, though that consensus can change over time.
Q2: If a merit good is so good for people, why wouldn't they just buy it themselves in the free market?
The key reasons are the three "I's": Information, Ignorance, and Income. People might lack full information about long-term benefits (e.g., the true return on a college degree). They might act with "myopia," or short-sightedness, preferring immediate gratification. Or, they may simply not have enough money to afford it, even if they value it. The free market responds to effective demand (demand backed by money), not just need or potential benefit.
Q3: Can government intervention ever make things worse?
Yes, there can be government failure. If a policy is poorly designed, it can be inefficient or have unintended consequences. For example, heavy subsidies for a specific crop might lead to overproduction and environmental damage. Providing a service for free can sometimes lead to overuse or reduce innovation if there's no competition. The cost of intervention (taxes) also needs to be considered. The goal is to find a balance where the benefits of correcting the market failure outweigh the costs and potential inefficiencies of the government's action.
Footnote
[1] Free Market: An economic system where prices for goods and services are determined by the open market and consumers, without significant government intervention.
[2] Market Failure: A situation in which the free market fails to allocate resources efficiently, leading to a net social welfare loss. Under-provision of merit goods is one type of market failure.
[3] Subsidy: A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
[4] Positive Externality: A beneficial side effect that affects an uninvolved third party. The consumption or production of a merit good creates positive externalities.
[5] Public Provision: The direct supply of a good or service by a government entity, funded through taxation.