What Is A Merit Good?
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A merit good is a good that is deemed intrinsically desirable by society due to its positive externalities. An example of a merit good is education. Education confers private benefit to the individual as there is personal satisfaction in gaining skills or knowledge. Furthermore, education allows an individual to get employment, have an income and therefore have a higher standard of living.
However, there is also social benefit because when an educated person enters the workforce, it (the workforce) is likely to become more productive. An uneducated person may only have the capacity to perform menial tasks such as crop cultivation or blue collar work whereas an educated person will probably be able to work in the higher value added electronics or medical sector. Economists generally agree that a more productive workforce is desirable as it can lead to economic growth and higher national income. Proof of this can be seen from the difference between the average GDP of countries that have a majority of its workforce in primary industries and those countries whose workforce is mainly in secondary or tertiary industries. A more educated workforce also increases the likelihood of higher value added foreign investment as there will be a ready supply of educated labour.
As merit goods are not public goods, they are in effect excludable and exhaustible. An example is again, places in an educational institution. Due to this scarcity, merit goods will command a price on the free market. Only those who can afford this price will consume the good. Consumers will only consume to the point where private cost is equal to private benefit. The optimum level of consumption is where social benefit equals social cost. Because consumers do not take into account the social benefit consumption has, there tends to be under-consumption of merit goods.