Merit good

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The concept of a merit good introduced in economics by Richard Musgrave (1957, 1959) is a commodity which is judged that an individual or society should have on the basis of some concept of need, rather than ability and willingness to pay. The term is, perhaps, less often used today than it was in the 1960s to 1980s but the concept still lies behind many economic actions by governments which are not performed specifically for financial reasons or by supporting incomes (e.g. via tax rebates). Examples include in-kind transfers such as the provision of food stamps to support nutrition, the delivery of health services to improve quality of life and reduce morbidity, subsidized housing and education.

Contents

Definition

A merit good can be defined as a good which would be under-consumed (and under-produced) in the free market economy. This is due to two main reasons:

  1. When consumed, a merit good creates positive externalities (an externality being a third party/spill-over effect which arises from the consumption or production of the good/service). This means that there is a divergence between private benefit and public benefit when a merit good is consumed (i.e. the public benefit is greater than the private benefit). However, as consumers only take into account private benefits when consuming merit goods, it means that they are under-consumed (and so under-produced).
  2. Individuals are myopic, they are short-term utility maximisers and so do not take into account the long term benefits of consuming a merit good and so they are under-consumed.[ citation needed ]

Justification

In many cases, merit goods provide services which should apply universally to everyone in a particular situation, a view that is close to the concept of primary goods found in work by philosopher John Rawls or discussions about social inclusion. Lester Thurow claims that merit goods (and in-kind transfers) are justified based on "individual-societal preferences": just as we, as society, believe that each person is entitled to an equal vote in the elections, we also believe that each person is entitled to an equal right to life, and hence an equal right to life-saving medical care. [1]

On the supply side, it is sometimes suggested that there will be more support in society for implicit redistribution via the provision of certain kinds of goods and services, rather than explicit redistribution through income. [2]

It is sometimes suggested that society in general may be in a better position to determine what individuals need, since individuals might act irrationally (for example, poor people receiving monetary transfers might use them to buy alcoholic drinks rather than to buy nutritious food).

Sometimes, merit and demerit goods are simply seen as an extension of the idea of externalities. A merit good may be described as a good that has positive externalities associated with it. Thus, an inoculation against a contagious disease may be seen as a merit good. This is because others who may not now catch the disease from the inoculated person also benefit.

However, merit and demerit goods can be defined in a different way which makes it different from externalities. The essence of merit and demerit goods is to do with an information failure to the consumer. This arises because consumers do not perceive quite how good or bad the good is for them: either they do not have the right information or lack relevant information. With this definition, a merit good is defined as good that is better for a person than the person who may consume the good realises. [3]

Other possible rationales for treating some commodities as merit (or demerit) goods include public-goods aspects of a commodity, imposing community standards (prostitution, drugs, etc.), immaturity or incapacity, and addiction. A common element of all of these is recommending for or against some goods on a basis other than consumer choice. [4] However, there is no reason why governments should not consult their populations on such issues as they increasingly do in a number of economic contexts (e.g., development planning by the World Bank or resource allocation in health systems using information on health-benefits).

In the case of education, it can be argued that those lacking education are incapable of making an informed choice about so many benefits of education, which would warrant compulsion (Musgrave, 1959, 14). In this case, the implementation of consumer sovereignty is the motivation, rather than rejection of consumer sovereignty. [4]

Public Choice Theory suggests that good government policies are an under-supplied merit good in a democracy.

Criticism

Arguments about irrational behavior of welfare receivers are often criticised for being paternalistic, often by those who would like to reduce to a minimum economic activity by government.

The principle of consumer sovereignty in welfare also suggests that monetary transfers are preferable to in-kind transfers of the same cost.

Related Research Articles

Externality

In economics, an externality is a cost or benefit that is imposed on a third party who did not agree to incur that cost or benefit. The concept of externality was first developed by economist Arthur Pigou in the 1920s. Air pollution from motor vehicles is an example of a negative externality. The costs of the air pollution for the rest of society is not compensated for by either the producers or users of motorized transport.

Public good (economics) Good that is non-excludable and non-rival

In economics, a public good is a good that is both non-excludable and non-rivalrous. For such utilities, users cannot be barred from accessing and/or using them for failing to pay for them. Also, use by one person neither prevents access of other people nor does it reduce availability to others. Therefore, the good can be used simultaneously by more than one person. This is in contrast to a common good such as wild fish stocks in the ocean, which is non-excludable but rivalrous to a certain degree. If too many fish were harvested, the stocks would deplete, limiting the access of fish for others. A public good must be valuable to more than one user, otherwise, the fact that it can be used simultaneously by more than one person would be economically irrelevant.

Conspicuous consumption Concept in sociology and economy

Conspicuous consumption is the spending of money on and the acquiring of luxury goods and services to publicly display the economic power of the income or of the accumulated wealth of the buyer. To the conspicuous consumer, such a public display of discretionary economic power is a means of either attaining or maintaining a given social status.

Information goods are commodities that provide value to consumers as a result of the information it contains and refers to any good or service that can be digitalized. Examples of information goods includes books, journals, computer software, music and videos. Information goods can be copied, shared, resold or rented. Information goods are durable and thus, will not be destroyed through consumption. As information goods have distinct characteristics as they are experience goods, have returns to scale and are non-rivalrous, the laws of supply and demand that depend on the scarcity of products do not frequently apply to information goods. As a result, the buying and selling of information goods differs from ordinary goods.

The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their preferences subject to limitations on their expenditures, by maximizing utility subject to a consumer budget constraint.

In philosophy, economics, and political science, the common good refers to either what is shared and beneficial for all or most members of a given community, or alternatively, what is achieved by citizenship, collective action, and active participation in the realm of politics and public service. The concept of the common good differs significantly among philosophical doctrines. Early conceptions of the common good were set out by Ancient Greek philosophers, including Aristotle and Plato. One understanding of the common good rooted in Aristotle's philosophy remains in common usage today, referring to what one contemporary scholar calls the "good proper to, and attainable only by, the community, yet individually shared by its members."

Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level.

Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

Goods Tangible or intangible thing that satisfies human wants and can be transferred

In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not transferable.

Rivalry (economics) the property of goods whose consumption by one consumer prevents, makes it harder to, or lessens the benefits of simultaneous consumption by other consumers

In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is considered non-rivalrous or non-rival if, for any level of production, the cost of providing it to a marginal (additional) individual is zero. A good is "anti-rivalrous" and "inclusive" if each person benefits more when other people consume it.

Consumer sovereignty is an economic concept where the consumer has some controlling power over goods that are produced, and the idea that the consumer is the best judge of their own welfare.

Club good

Club goods are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs. Often these goods exhibit high excludability, but at the same time low rivalry in consumption. Thus, club goods have essentially zero marginal costs and are generally provided by what is commonly known as natural monopolies. Furthermore, Club goods have artificial scarcity. Club theory is the area of economics that studies these goods. One of the most famous provisions was published by Buchanan in 1965 "An Economic Theory of Clubs," in which he addresses the question of how the size of the group influences the voluntary provision of a public good and more fundamentally provides a theoretical structure of communal or collective ownership-consumption arrangements.

Positional goods are goods valued only by how they are distributed among the population, not by how many of them there are available in total. The source of greater worth of positional goods is their desirability as a status symbol, which usually results in them greatly exceeding the value of comparable goods.

A Lindahl tax is a form of taxation conceived by Erik Lindahl in which individuals pay for public goods according to their marginal benefits. In other words, they pay according to the amount of satisfaction or utility they derive from the consumption of an additional unit of the public good. Lindahl taxation is designed to maximize efficiency for each individual and provide the optimal level of a public good.

In economics, a demerit good is "a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves"; it could be over-consumed if left to market forces. Examples of demerit goods include tobacco, alcoholic beverages, recreational drugs, gambling, junk food and prostitution. Because of the nature of these goods, governments often levy taxes on these goods, in some cases regulating or banning consumption or advertisement of these goods.

Internality

An internality is the long-term benefit or cost to an individual that they do not consider when making the decision to consume a good or service. One way this is related to behavioral economics is by means of the concept of hyperbolic discounting, in which immediate consequences of a decision are disproportionately weighed compared to the future consequences. A potential cause is lack of access to full information regarding the associated costs and benefits prior to consumption. This contrasts with traditional economic theory, which makes the assumption that individuals are rational decision makers who take all personal costs into account when paying for goods and services.

Public economics is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve social welfare.

The benefit principle is a concept in the theory of taxation from public finance. It bases taxes to pay for public-goods expenditures on a politically-revealed willingness to pay for benefits received. The principle is sometimes likened to the function of prices in allocating private goods. In its use for assessing the efficiency of taxes and appraising fiscal policy, the benefit approach was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919), two economists of the Stockholm School. Wicksell's near-unanimity formulation of the principle was premised on a just income distribution. The approach was extended in the work of Paul Samuelson, Richard Musgrave, and others. It has also been applied to such subjects as tax progressivity, corporation taxes, and taxes on property or wealth. The unanimity-rule aspect of Wicksell's approach in linking taxes and expenditures is cited as a point of departure for the study of constitutional economics in the work of James Buchanan.

In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and labour power. The concept originated in Ricardian socialism, with the term "surplus value" itself being coined by William Thompson in 1824; however, it was not consistently distinguished from the related concepts of surplus labor and surplus product. The concept was subsequently developed and popularized by Karl Marx. Marx's formulation is the standard sense and the primary basis for further developments, though how much of Marx's concept is original and distinct from the Ricardian concept is disputed. Marx's term is the German word "Mehrwert", which simply means value added, and is cognate to English "more worth".

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

  1. ↑ Thurow, Lester C. (1974). "Cash Versus In-Kind Transfers". The American Economic Review. 64 (2): 190–195. ISSN   0002-8282. JSTOR   1816041.
  2. ↑ Musgrave and Musgrave, 1973, p. 81
  3. ↑ CIE International AS and A level Economics -.131
  4. 1 2 Musgrave, 1987, p. 452
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