Merit & Demerit Goods

Merit Goods

Goods for which the social benefits of consumption exceed the private benefits of consumption. Value judgements are involved in deciding that a good is a merit good.

E.g. Market for education:

• Gives private benefits to the direct consumer of education (students).
• Also gives wider benefits to society. E.g. Innovation, more employment, high skilled jobs -> higher pay -> more tax paid. These are +ve consumption externalities.

Private educators are profit maximisers and only concerned with profit. Therefore, there is market failure because there is under-consumption (& under-provision) of education. Too few resources are allocated to the provision of education.

One way the gvnmt. can correct the under-consumption of a merit good such as education is to subsidise the provision of education.

Demerit Goods

Goods for which the social cost of consumption exceed the private…