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AS Economics Revision - Public & Merit Goods Quiz 1

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​Should there be a minimum legal price for alcoholic drinks in the UK as an intervention to tackle the market failures associated with excessive drinking? This short video looks at some of the arguments and the evidence.

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Public Goods and Market Failure I A Level and IB Economics

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​De-merit goods deliver a lower benefit to the consumer than he/she realises at the time of consumption. They tend to be over-consumed in the free market leading to a misallocation of resources, i.e. market failure. It is important to remember that value judgements are nearly always involved in what constitutes a de-merit good.

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This is a short revision video looking at increasing pressures on health care spending in the UK and some of the arguments for greater state or market forces in providing health care.

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Difference between Merit Goods and Pure Public Goods I A Level and IB Economics

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Definition of Merit Good

A merit good has two characteristics:

1. People do not realise the true personal benefit. For example, people underestimate the benefit of education or getting a vaccination.

2. Usually, these goods also have a positive externality.

Therefore in a free market, there will be under consumption of merit goods.

Examples of Merit Goods

Health Care - people underestimate the benefits of getting a vaccination. If people do get a vaccination, then there will be a personal benefit in protecting against diseases. Also, there will be external benefits to the rest of society because it will help reduce the prevalence of disease in the rest of society.

Museums - the educational benefit of museums.

Education - People may undervalue the benefits of studying, and decide to leave school early or not get good grades.

Demerit Good

A demerit good has two characteristics:

1. A good which harms the consumer. For example, people don't realise or ignore the costs of doing something e.g. smoking, drugs.

2. Usually, these goods also have negative externalities. If you smoke you harm yourself, but also the smoke negatively affects other people.

Therefore in a free market, there will be overconsumption of these goods.

Examples of Demerit Goods include:

Smoking - People underestimate health costs or risks of getting addicted.

Drinking - Health costs to drinkers. Costs to society include more expenditure on health care and policing.

Taking drugs - Health costs to drug users - people underestimate risks of getting addicted. External costs of more crime.

More on demerit goods

Value judgement on merit goods

Merit and demerit goods involve making a value judgement that something is good or bad for you. Classification is not always straightforward. For example:
Cannabis

Cannabis is widely considered a demerit good - it contributes to lung cancer and can lead to psychological problems, such as paranoia.

However, supporters of cannabis might argue cannabis is a harmless drug which can help people deal with physical pain and enjoy life more.

Contraception

Supporters of family planning may argue contraception is a merit good because contraception can involve personal costs of unwanted pregnancy.

The Catholic church views contraception as a sin and may argue it is actually a demerit good because its use encourages sexual promiscuity and undermines family values.

Related

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Merit and Demerit Goods - Economics Help

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Definition of Merit Good A merit good has two characteristics: People do not realise the true personal benefit. For example, people underestimate the benefit of education or getting a vaccination. Usually, these goods also have a positive externality. Therefore in a free market, there will be under consumption of merit goods.

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Effects of Price Ceilings and Price Floors

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Carbon Heating Film Installation Instructions Under Laminate Flooring

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​The UK has introduced a Carbon Price Floor which applies to fossil fuels used for electricity generation. The minimum price for carbon emissions is designed to provide a stable carbon price signal as a way of internalising externalities. But what are some of the arguments for and against imposing a carbon price floor?

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​The number of public libraries in the UK is declining year on year and so too is usage of them. Libraries are widely regarded as merit goods generating external benefits. To what extent should there be an increase in public funding (subsidy) of library services?

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Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.

Merit goods and services create positive externalities when consumed and these 3rd party spill over benefits can have a significant effect on social welfare. Market failure occurs when merit goods and services are under-consumed under free market conditions.

Policy intervention can help either through offering financial incentives (e.g. consumer or producer subsidies) or through behavioural nudges and information campaigns designed to change our choices.

Who provides merit goods?

Both the state and private sector provide merit goods & services. We have an independent education system and people can buy private health care insurance.

Consumption of merit goods is believed often to generate positive externalities- where the social benefit from consumption exceeds the private benefit.

A merit good is a product that society values and judges that people should have regardless of their ability to pay. In this sense, the government is acting paternally in providing merit goods and services. Individuals may not act in their own interest because of imperfect information.

What are some good examples of merit goods?
Good examples of merit goods include health services, contraception, education, work training programmes, public libraries and museums, Citizen's Advice Bureaux and inoculations for children
Education as a merit good

Parents may be unaware of the longer-term benefits that their children might derive from education.

Education is a long-term investment decision. The private costs must be paid now but the private benefits (including higher earnings potential over one's working life) take time to happen. Education provides external benefits including rising incomes and productivity for current and future generations and an increase in occupational mobility to help to reduce unemployment.

Increased spending on education should also provide a stimulus for higher-level research which can add to the long run trend rate of growth. Other external benefits might include the encouragement of a more enlightened and cultured society. Providing that the education system provides a sufficiently good education across all regions and sections of society, increased education and training spending should also open up more equality of opportunity.

Notice here that we are talking about the sorts of goods and services that society judges to be in our best welfare. Judgements involve subjective opinions - and we cannot escape from making value judgements when we are discussing merit goods.
Why does the government provide merit goods and services?

1. To encourage consumption so that positive externalities of merit goods can be achieved for example free inoculation against infectious diseases

2. To overcome the information failures linked to merit goods

3. On grounds of equity - because the government believes that consumption should not be based solely on the grounds of ability to pay for a good or service

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Explaining Merit Goods | tutor2u Economics

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What are merit goods?Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.

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Pollution is a significant negative externality and can result from a number of activities. Industrial pollution by sulphuric and nitric acid ('acid rain') can arise as a by-product of the production process in many industries, such as smelting and refining.

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Economics Online

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In contrast to a private good, when individuals consume a demerit good there are spillover effects which reduce benefits to third parties. For example, if a driver consumes excessive alcohol and then crashes into an innocent driver causing damage to their vehicle, a negative consumption externality has arisen.

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The Government is to pilot a "voucher" style system of support for vulnerable children under which money will go to one lead professional to purchase services on their behalf.

The pioneering scheme will give each child in need of extra help from social services, the health service or education, one person to champion their cause.

Called "lead professionals" and drawn from groups such as health visitors, youth workers and nursery nurses, they will be given a budget with which to commission services from statutory, private or voluntary services.

The Chancellor announced £10 million over the next two years to pilot the scheme aimed at integrating services around the needs of the child and family.

The Department for Education said the funding that lead professionals would control had not been decided. It was unable to confirm that they could use the money to buy an independent boarding or special school place or by-pass the NHS.

A 2.5 per cent pay increase for teachers for each of the next two years was announced, bringing the pay of an experienced teacher to between £33,444 and £40,002.

A report into Britain's skills needs by Lord Leitch, the former chief executive of Zurich Financial Services, commissioned by the Treasury, warned that current targets for improving adult literacy and numeracy would be difficult to achieve. Half of adults do not have the maths abilities and one in six lacked the literacy level expected of an 11-year-old, he said in the report, published yesterday.

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By Liz Lightfoot, Education Correspondent

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The Government is to pilot a "voucher" style system of support for vulnerable children under which money will go to one lead professional to purchase services on their behalf. The pioneering scheme will give each child in need of extra help from social services, the health service or education, one person to champion their cause.

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Economics Online

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The market for merit goods is an example of an incomplete market. Merit goods have two basic characteristics