Skip to main content

Merit Good

Go Search
Home
About
New Atlas
Atlas, A-Z
Atlas Maps
MPP/MPA Programs
Subjects
Core Topics
Illustrative Courses
Topic Encyclopedia
Concept Dictionary
Competencies
Career Tips
IGOs
Best Practices Project

Kaldor-Hicks Criterion
Keynesian Economics
Knowledge Management
Knowledge Networks
Knowledge Project
Knowledge-Based Economy
Kyoto Protocol
Labour Force
Labour Force Participation Rate
Labour Migration
Labour Productivity
Labour Union
Law of Demand
Leader
Leadership
Leadership Development
Learning Organization
Least Developed Nations
Legislation
Legislative Auditor
Legislative Committees
Legislative Federalism (in Canada)
Legislature
Legitimacy
Legitimate Coercion
Lessons Learned (in evaluation)
Levers of Development
Liberal Democracy
Liberalism
Likelihood (in relation to Risk)
Line Departments
Line-Item
Liquidity
Literature Review
Lobbying
Local Democratization
Localism
Localization
Logic Model
Low-Income Intensity
Lumpsum Tax
Luxury Good
Machinery of Government (in Canada)
Macroeconomics
Major Statutory Spending
Management Accountability
Management Accountability Framework
Management Consultant
Management Control System
Management Improvement
Management Practices and Controls
Managerialism
Managing Compliance
Managing-for-Results
Marginal Cost Analysis
Marginal Rate of Substitution
Marginal Utility
Market Demand Curve
Market Failure
Memorandum to Cabinet
Mental Health Effects on Child Development
Merit Good
Merit System
Microeconomics
Millennium Development Goals
Minimum-Wage Law
Ministerial Organizations (in Canada)
Ministerial Responsibility (in Canada)
Mission Creep
Mission Statement
Mixed Economy
Modern Comptrollership
Modified Accrual Accounting
Monetary Neutrality
Monetary Policy
Money Multiplier
Monopoly
Monotonic Property of Technology
Monotonic Transformation
Montreal Protocol
Moral Hazard
Moral Suasion
Multi-level Governance (MLG)
Multiple Perspective Analysis
Multiple Regression Analysis
Multiplier Effect
Municipalities as “creatures of the provinces”

 

Merit Good

Merit goods have two basic characteristics: the net private benefit to the consumer is not fully recognised at the time of consumption and, while consumption of a merit good also generates an external benefit to others, from which society gains, this is unlikely to be known or recognised at the point of consumption.

(Economics Online at http://www.economicsonline.co.uk/Market_failures/Merit_goods.html, accessed 30 May 2015.)

----------------------------------------

The market for merit goods is an example of an incomplete market. Merit goods have two basic characteristics: Firstly, unlike a private good, the net private benefit to the consumer is not fully recognised at the time of consumption. Net private benefit is the utility from gained from consumption less any private cost incurred, and equates to net consumer surplus. In the case education, which is widely considered to be a merit good, pupils and students cannot possibly know the specific private benefit to them of getting good grades at school, college or university. They will be well aware of the sacrifice required to study, but will not know the benefits to them in terms of a future job, salary, status and skills. Therefore, with education, as with other merit goods, there is a significant information failure in terms of expected benefits. Secondly, while consumption of a merit good also generates an external benefit to others, from which society gains, this is unlikely to be known or recognised at the point of consumption. Given that decisions to consume are driven by self-interest, it is unlikely that this external benefit will be taken into account when the consumer of a merit good evaluates its worth. For example, an individual student is generally not motivated to study hard in order to benefit others later in life, although everyone associated with them will benefit from their education in some way. Beneficiaries include future employers and all those who consume the products supplied their employer, their family, and friends. The better job they obtain, the more tax they will pay, and the greater the benefit to those who receive welfare benefits and transfers. However, putting a value on these external benefits is impossible, especially at the point of learning.

Healthcare is also regarded as merit good. For example, although it is not possible to know exactly when the benefit will arise, inoculation against a contagious disease clearly provides protection to the individual, and yields a private benefit. There is also an external benefit to other individuals who are protected from catching the disease from those who are inoculated! However, few would choose inoculation simply to protect others!

Economic theory predicts that while markets may form to supply some merit goods, total supply will be insufficient to achieve a socially efficient level of consumption. A number of factors explain the lack of merit goods in a free market economy. There is a significant level of information failure, in terms of both the private and the external benefits resulting from consumption of merit goods. For example, there is likely to be considerable information failure in terms of recognising the benefit to themselves, and to others, of regular health checks, eye tests, or visits to the dentist. There may also be considerable time lags in deriving the benefit of a merit good. This is clearly the case with education, where the private benefits may not occur for ten or twenty years after consumption. Given that individuals are driven largely by self-interest, the external benefit of consuming a merit good is not likely to be included in the private calculation of buyers and sellers. However, society needs as many people as possible to be educated and healthy so that all individuals can receive the maximum external benefit. Finally, individuals and families on low incomes are not likely to be able to pay the full market price of merit goods, and will under-consume. For example, to continue to supply private education, tuition fees must be set to cover the full costs of supply. However, private fees are likely to be well in excess of what many low income families could afford to pay. Because of the above, it is likely that merit goods will be under-consumed and under-supplied.

(Economics Online at http://www.economicsonline.co.uk/Market_failures/Merit_goods.html, accessed 30 May 2015.)

 


Important Notices
© University of Toronto 2008
School of Public Policy and Governance