Merit Goods

Updated on January 30, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Merit Goods?

Merit goods are products that society deems desirable and that are likely to be under-produced and under-consumed due to the market system. These goods aim to promote the products and services to improve societal well-being. Moreover, these goods are financed by the government.

Merit Good

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Merit goods generate positive externalities, where the societal benefit outweighs the personal profit. They help cut down on crime and are things that society values and desires everyone should own, regardless of whether a person wants them. For example, education, health care, housing, fire protection, garbage collection, public parks, and welfare services are merit goods.

Key Takeaways

  • Merit goods are products that society deems desirable and that are likely to be under-produced and under-consumed due to the market system. These goods are either not taxed or at a lower rate to increase their consumption.
  • Education, health care, housing, fire protection, garbage collection, public parks, and welfare services are merit goods.
  • They are excludable and rivalrous goods. In comparison, public goods are non-excludable and non-rivalrous.
  • These goods provide several benefits, including improved public health, increased social mobility, environmental sustainability, reduced social costs, and improved overall well-being.

Merit Good Explained

Merit good definition refers to a product or service that is considered to have significant social benefits and is usually under-consumed in the market. Two reasons why merit goods are under-produced and under-consumed in a free market economy are:

First, consumption of merit goods generates positive externalities, meaning that the public benefit derived from their consumption exceeds the private benefit gained by the individual consumer.

On the other hand, consumers only consider personal benefits while consuming the majority of commodities, suggesting that they are under-consuming (and hence under–produced). Second, as short-term utility maximizes, individuals tend to under-consume merit products because they do not consider the long-term advantages of doing so.

Therefore, by promoting the consumption of these goods, governments can help to improve public health, reduce social inequality and promote sustainable development. Moreover, providing these products can help address market failures, which occur when the market fails to allocate resources efficiently.

Merit goods benefits include improved public health, increased social mobility, environmental sustainability, reduced social costs, and improved overall well-being. The classification of merit goods can be done differently. However, some standard types include basic needs, environmental goods, social goods, cultural goods, and technological goods. Moreover, governments consider providing merit goods a crucial responsibility, although this concept often faces challenges and failures. Therefore, the ordinary merit good shortcomings are:

  • Under-provision
  • Over-provision
  • Quality concerns
  • Inequitable distribution
  • Crowding out private provision

Furthermore, these goods are under-provided by the market for the following reasons:

  • They generate many positive externalities.
  • There is an unequal distribution of income among the general masses.
  • Consumers may need more information to assess or access it.
  • Consumers are still determining their future needs regarding these goods and services.

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Examples

Let us understand the concept better with the help of an example.

Example #1

Suppose the US government subsidize child care for low-income families. Additionally, a voucher program that covers all childcare costs for eligible families can achieve this. By doing so, the government can ensure that the children receive high-quality care that promotes their development and prepares them for school success and beyond. Additionally, parents can work or attend school without worrying about the cost or quantity of child care. Hence, this can improve economic growth and reduce poverty.

Therefore, to ensure that everyone in the community can access this essential service, funding for this childcare may come from taxes or other public support. Overall, subsidized child care is a merit good, providing many benefits to the children and their parents.

Example #2

The COVID-19 pandemic has underlined the importance of prevention, precaution, and personal hygiene. Governments across the globe have advocated taking vaccine shots as a precautionary measure against the virus. Furthermore, vaccines not only boost one’s immunity to prevent people from getting the flu in the first place, but they also reduce the negative impact if one does get it. They benefit society by keeping people from becoming infected with the virus.

Besides, despite the availability of these vaccinations, various sections of the population rejected them for different reasons. Moreover, this includes opinions about the disease and the vaccine’s effectiveness, side effects, etc. Some do not believe in taking vaccines at all. Therefore, vaccines are considered merit goods that suffer from underutilization due to imperfect information.

Merit Goods And Demerit Goods

In a free market, merit goods are under-consumed due to positive externalities, while demerit goods are over-consumed due to negative externalities.

Key differencesMerit GoodsDemerit Goods
PurposeTo promote social welfare, economic growth, and environmental stabilityIt aims to discourage harmful behavior and reduce negative externalities

Taxes
These goods are not taxed at lower rates to promote consumption.Demerit goods are heavily taxed to discourage consumption, leading to negative externalities.
ExampleEducation and healthcareTobacco and illegal drugs
Role of GovernmentProvides subsidies or public goods to promote consumptionRegulating discourage consumption 

Merit Goods vs Public Goods

Merit goods and public goods are different from each other. The comparison below can help us understand the distinction better.

Key differencesMerit GoodsPublic Goods
MeaningMerit products are goods and services that the government believes would benefit individualsPublic goods are accessible to all and portions of society, unlike merit goods, which are solely available to specific groups within society.
ProvidersBoth private and public sectors provide merit goods.Public goods are concentrated on providing welfare services only by the State.
ExcludabilityMerit goods are excludable. This means that consumption can be limited to those who pay for it.These are non-excludable, which means that consumption cannot be limited to those who pay for them.
ExampleHealth care, housing, and education.Lighthouses, defenses of the country, pavements on roads, etc.
FinancingFunded by the government through taxation or subsidiesThey are supported by the government through taxation or user fees

Frequently Asked Questions (FAQs)

1. How to increase the consumption of merit goods?

Lowering prices and expanding demand are two ways that governments can address the undersupply of goods that deserve to be produced. Another strategy is to offer subsidies. For example, the output of merit goods, provided by both the public and commercial sectors, may be increased by offerings to the socially ideal level.

2. Are merit goods always free?

These goods are only sometimes free. Although the government may provide subsidies or tax incentives to promote the consumption of these goods, they are usually not offered entirely free of charge. Instead, the consumer must pay some amount through user fees or out-of-pocket expenses to access these goods or services.

3. Are merit goods private goods?

No, these goods are not private as private goods are both excludable and rivalrous in consumption. However, the private sector can provide some merit products; the government or non-profit organization typically provides them.

This article has been a guide to what is Merit Good. Here, we explain it with its examples, and comparisons with demerit goods and public goods. You may also find some useful articles here –

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