Merit and Demerit Goods

3 Key excerpts on "Merit and Demerit Goods"

• 

  eBook - ePub

  Health Economics

  An Industrial Organization Perspective

  • Xavier Martinez-Giralt, Pedro Barros(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  ERIT GOODS ). A merit good is any product or service that society considers its members should have even though they have not expressed any demand for it.

  In this sense it is argued that the consumption of a merit good is better for an individual than what (s)he is able to perceive. Based on this idea governments carry out actions that are not justified on economic reasons. Typical examples are food stamps to support nutrition, subsidized education, and in the health care sector, free vaccination for children, and other provision of health care services to improve quality of life and reduce morbidity (such as programs on drug addiction, prostitution, or the handicapped). It is important not to confuse merit goods with equity issues in the sense that a society may consider universal access to some goods regardless of income levels, as desirable. Finally, it is also important to distinguish merit (and demerit) goods from positive (and negative) externalities. A free vaccination campaign may be a merit good generating an externality. The merit good characteristic arises from the information failure on the part of the consumer to judge how good or bad such policy is. As a by-product, a vaccination campaign against a contagious disease prevents its transmission. Examples of demerit goods are tobacco, alcoholic beverages consumption, recreational drugs, gambling, or prostitution. Social qualification as demerit goods justifies the levy of taxes and consumption bans on these goods by the government. This regulation on top also attempts to reduce the negative externality on members of the society who do not consume those goods.

  5.8 Yardstick competition

  In a previous section it was argued that asymmetries of information between the regulated entity and the regulator allow the former to enjoy economic rents under some circumstances. Now we assess the role of comparison between similar regulated institutions in mitigating the information asymmetries. When there are several regulated institutions, the regulator may try to use “competitive” mechanisms to achieve a better allocation of resources (similar to those obtained under perfect information of the regulator). This is known in the jargon as “yardstick competition” and was introduced by Schleifer (1985). The existence of similarly regulated institutions allows for a sort of performance-based regulation. Using information from other regulated firms, the regulator can create additional pressure upon the regulated entity.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Economics: A Complete Introduction: Teach Yourself

  • Thomas Coskeran(Author)
  • 2012(Publication Date)
  • Teach Yourself

    (Publisher)

  Although usually supplied by governments, roads are not public goods. They combine rivalry in use with possible excludability. The transaction costs of excluding users are, though, normally too high so, in practice, they have one of the qualities of a public good. For this reason, they are known as quasi-public goods.

  MERIT GOODS

  ‘Merit goods’ are those for which consumer demand does not fully reflect consumer benefits. The market will undersupply merit goods, either because those who would benefit from them will not realize they will, or, if they do realize, their demand is ineffective.

  Education is often cited as an example of a merit good. In all countries, governments do not allow that the market alone provides it. They fear children would not receive enough education because they, and their parents, might underestimate the benefits. Market demand would fail to reflect MSB. Instead, governments step in and require children to consume education up to a certain age. And because parents might not recognize the benefits of education and prevent their children being educated, the government often requires that parents must, by law, ensure children attend school.

  Goods might be ‘demerit’ as well. With these, people might consume more than is good for them. Again, the market fails. Drugs like heroin are often classed as such and their use made illegal to control consumption. But, as we saw in Chapter 6 , this creates its own problems.

  Generally, though, economists look upon the idea of merit (and demerit) goods with scepticism. It suggests consumers do not know what is best for them. Economic market theory, though, assumes consumers do know their own interests and are rational in choosing the goods that maximize their utility. Suggesting otherwise undermines the principle of consumer sovereignty that is central to how markets are meant to work.

  It is also hard, in practice, to decide what merit goods are. The danger is that any good might be a merit good. The case for education looks clear-cut. Agreement on its benefits are widespread. But a case could be made for the importance of attending football matches or, better still, buying this book. And yet many would object to the idea that governments should provide these tremendous opportunities. In short, such difficulties make it doubtful that merit goods cause market failure.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Art and Craft of Policy Analysis

  Reissued with a new introduction by B. Guy Peters

  • Aaron Wildavsky, B. Guy Peters(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Under- or Overproduction of Merit Goods . Because the preferences of consumers are distorted, the market is unable to provide the merit good; it doesn’t receive the signals it would need to respond correctly. The good may be underprovided (a merit good) or overprovided (a demerit good). Discussion is on either the level at which the good is provided, or, in some cases, on whether it should be provided at all.

  Knowledge of a Correct or Better Preference . Someone must know what a correct preference is so that distortion in others can be recognized. Who that might be and how they might legitimate their claims raises the most intriguing questions about merit wants.

  Altruistic Consumption . That an individual or a group of individuals would want to interfere in the preference patterns of others requires that they have something to gain by doing it and that they believe in the interest of these others. Pulsipher argues that merit goods have externalities, like social goods, but that they are “psychic.”

  53

  This is an example of what economists call “interdependence of utilities,” meaning that the individual who interferes with the preferences of others derives satisfaction from their consumption of the merit goods. This psychic consumption must be altruistic, for otherwise it would not differ from suppression by oppression. Interference is justified on the grounds that some people know what is best and also want to do what is best for others. Again cogitation is elevated over interaction.

  Preference Interference . “The implementation of such wants,” Elisha Pazner writes, “involves to some extent imposing on individuals choices that they would not otherwise make.”

  54

  Such imposition is intended to raise or lower the consumption of a good. There must be, therefore, some kind of institutional ability to provide or constrain consumption.

  How close, then, is merit wants to opportunity costs? About as far as you can get.

  How does merit wants deal with resource scarcity ? It doesn’t. If goods are intrinsically meritorious, they ought to be provided by government. How are alternatives to be generated? By people who know better than we do. By what standards would goods be judged meritorious? Automatic acceptance of markets gives way to uncritical acceptance of government. How failure

  Sign up to read

  Learn more about book