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Sign in with your library card Please enter your library card number. Related Content Related Overviews externality paternalism. Show Summary Details Overview merit goods. Reference entries merit goods in A Dictionary of Economics 3 Length: words. All rights reserved. Sign in to annotate. Therefore, because the individuals are unaware of the higher social benefit, the MPB curve always lies below the MSB curve and this leads to the good being under-consumed in the market e.
However, evaluating whether a good is classed as a merit or demerit good depends on the subjective value of the individual i.
The degree of market failure in this market is highlighted by the dead weight loss triangle - this measures the external benefit that the market has not exploited because of the under consumption. Therefore to eliminate this market failure and to provide the market with the socially optimum level of output, the government must intervene to correct the difference between the MPB and MSB curves.
Governments will try to increase the supply of the good, which in turn will increase the consumption of the good. The level of government intervention will depend crucially on the size of the external benefit foregone as a result of the market failure.
For extremely important merit goods such as health care and education, the government is likely to introduce subsidies to ensure that these types of goods are free at the point of consumption. The impact of the subsidy will be to reduce the costs of production for the market providers of the good and this will shift the MPC curve outwards The size of the MPC curve shift will depend on the value of the subsidy imposed on the market.
If the subsidy is applied correctly to the market this means the socially optimal level of output will be produced and the market failure will be eliminated. This is shown in the diagram below:. But, just because the government intervenes in the market, this does not guarantee that the market failure will be eliminated.
As a consequence, the supply of rented accommodation would shift from S to S1, and the shortage would increase to Q3Q2. Thus, unless the government could shift the supply curve to the right, for example by building more publicly owned council houses, the long term shortage would worsen, with the existing rent-controlled stock descending into an ever greater state of disrepair, as a result of landlords seeking to reduce their costs by postponing or cancelling repair and maintenance work.
Subsidies may be used to increase the output of merit goods, provided both by the private and public sectors, to the socially optimum level. For example, the theatre is usually provided by the private sector , and is often regarded as a merit good on account of the educative and civilising benefits that it confers on society.
The government might take the view that without state assistance to the arts, there would be an unacceptably small number of theatres able to survive. Figure 2 illustrates how the subsidy would operate. In the diagram, the free market price of theatre tickets is established by the intersection of the curves D and S at OP, with the equilibrium quantity at OQ. A government subsidy, equivalent to the vertical distance XY, would have the effect of shifting the supply curve to the right, causing the market price to fall to OP1 and the quantity of theatre tickets demanded and supplied to increase to OQ1.
In the case of health care in several West European countries, the majority of it is provided free to the user out of general taxation, although charges may be levied for prescriptions and optical and dental treatment. In these cases the prices charged have been made cheaper than they would otherwise be, with patients only paying part of the cost of treatment and the government making up the difference through the payment of subsidies to suppliers.
In the case of housing, owner occupiers receive a subsidy through the receipt of tax relief on mortgage interest repayments, which is not available to those people who rent their accommodation.
State education like health care, may be provided without direct charges being made, although education vouchers represent an alternative form of market-based, subsidised provision which has been proposed.
The economic theory of traffic congestion Possible government responses to externalities Direct government provision Extension of property rights Taxes and subsidies Tradeable pollution rights Regulation, legislation and direct controls Public goods Merit goods Government responses - merit goods Demerit goods Government responses - demerit goods Abuse of monopoly power Inequality Section 2.
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