Generating a positive externality.
© mnirat/stock.adobe.com
- Also Known As:
- merit wants
In economics, a merit good is a commodity whose consumption provides benefits to individual consumers and generates positive externalities for society as a whole. Individuals typically underconsume merit goods because they donât fully recognize the benefits, so governments may provide or subsidize them to encourage consumption.
The concept of merit goods (originally called merit wants) was first introduced by economist Richard Musgrave in 1957 in an article on budget determination in FinanzArchiv and then summarized in his 1959 book The Theory of Public Finance.
Health care, education, and climate-related initiatives are common examples of merit goods.
- Preventative vaccinations. Vaccines reduce the risk of disease and helps individuals live longer, healthier lives. Society benefits because infectious disease outbreaks are less likely to occur when individuals are vaccinated.
- Higher education.Advanced knowledge and skills enhance an individualâs employability and income potential. Societies with high rates of education have more civic involvement, more economic growth, and lower crime rates.
- Renewable energy. As of the early 21st century, most of the worldâs energy is derived from fossil fuels, despite the associated negative externalities, such as air pollution and the emission of greenhouse gases, which have been linked to climate change. Energy derived from replenishable sources such as solar, wind, and hydroelectric aim to reduce externalities tied to fossil fuels.
Underconsumption, market failure, and the role of government
Merit goods are typically underconsumed (and therefore underproduced) because:
- Consumers may not have enough information about a good to make an informed decision.
- They donât consider the long-term benefits.
- They donât factor in the positive externalities for society.
Without factoring in the externalities of a merit good, there will always be the appearance of a market failure (the market will be incapable of delivering an optimal result).
From an economic theory perspective, a supply-and-demand equilibrium for a merit good should be where the marginal social benefit (MSB) is equal to the marginal social cost (MSC). But because individuals donât fully factor in the positive externalities for society, the MSB curve falls below the MSC curve, resulting in underconsumption.
Government intervention aims to correct the difference between the curves to increase the consumption of merit goods.
Merit goods vs. demerit goods
Unlike merit goods that benefit individuals and have positive externalities for societies, demerit goods are harmful to individuals and have potential negative externalities to societies. They are often overconsumed because individuals may not realize the extent of their harmfulness, and they tend to ignore the negative externalities.
Examples of demerit goods include tobacco, alcohol, and illegal drugs. Negative externalities resulting from the consumption of demerit goods can be seen in the harmful effects of secondhand smoke on others. Alcohol and drug consumption can contribute to increased violence and crime in a society.
To discourage the consumption of demerit goods, governments often place heavy taxes on them and impose minimum age regulations on their use.
Merit goods vs. public goods
Merit goods are excludable, meaning their consumption can be limited to individuals who are able to pay for them. For example, health care and education can be provided privately, but providers may exclude individualsâor at least, some level of serviceâif they are unable to pay.
Public goods are non-excludable, meaning their consumption cannot be limited to individuals who are able to pay for them. For example, street lighting is a service provided to all individuals in a community regardless of how much they pay in taxes.
Laura Payne
