Merit Goods Explained

Quick Definition: Merit goods are goods that bring wider benefits to society if they are consumed. They are generally under supplied by the private sector so the government provides them as well.

What are merit goods?

Merit goods are goods or services that have significant external benefits to society if they are produced and consumed. However, many people in society will not consume merit goods because the private sector charges too high a price that they can afford or are willing to pay. As a result, if it was left to the private sector, merit goods would be under produced and under consumed. The government will usually intervene and provide merit goods free of charge, or subsidised, so that everyone can consume them. Consequently society will be better off as a whole due to the increase in external benefits created by merit goods.

For example, education is considered as a merit good. When people are educated they bring wider benefits to society in terms of lower crime, higher productivity in the economy and potentially higher taxes from employment.

However, the firms who sell education don’t care about these benefits, they only care about the fees they receive from people paying for education. Furthermore, the people who want to be educated don’t care about the wider benefits from being educated, they just care about the benefits they receive such as better job prospects.

As a result, the firms that sell education sell it at too high a price that a lot of people can afford or are willing to pay. This is why the government has stepped in and created state schools so people can be educated for free and society can receive the external benefits that come with it.

Key terms
  • Under production – This is when a good or service has significant external benefits to society and therefore it is under produced by the private sector. Healthcare is an example of a service that is under produced by the private sector and this is why it is it is also provided by the government.
  • Social benefit – This is the total benefit of producing goods and services. Social benefit is calculated by adding up the private benefits and external benefits of a transaction.
  • External benefits – These are the benefits of a firm or individual using a product that are felt by third parties i.e. the general public or the environment.
  • Market failure – This is a situation when the free market system leads to an inefficient allocation of resources. An example of a market failure is an externality.