Merit Goods Research Paper

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The concept of merit wants or merit goods was first proposed by Richard A. Musgrave (1910–2007) in 1957 in an article on budget determination in FinanzArchiv ; he revisited the concept in his Theory of Public Finance in 1959. For Musgrave, merit goods are goods that are “considered so meritorious that their satisfaction is provided for through the public budget, over and above what is provided for through the market and paid for by private buyers” (1959, p. 13; Musgrave 1998). Musgrave identified education, free school lunches, low-cost housing, and health care as important and common examples of merit goods.

While Musgrave coined the term merit goods, he was by no means the first to propose a role for the government in the provision of education. Adam Smith (1723–1790) was concerned in the Wealth of Nations (1776) with the dulling effect of the deepening division of labor on the intellectual faculties of the common people, and he promoted public provision of education as a remedy to the situation (Smith [1776] 1937, p. 737). Later, in the middle of the nineteenth century, John Stuart Mill (1806–1873) argued that:

Any well-intentioned and tolerably civilized government may think, without presumption, that it does or ought to possess a degree of cultivation above the average of the community which it rules, and that it should therefore be capable of offering better education and better instruction to the people, than the greater number of them would spontaneously demand.… The case is one to which the reasons of the non-interference principle do not necessarily or universally extend. (Mill [1848] 1970, p. 318)

While seeking to justify government provision of education, Mill at the same time denied the legitimacy of government monopoly in education (Mill [1848] 1970, p. 320).

Merit goods have had a somewhat contested position in economics, but perhaps less so in policy practice. The traditional economic view of governmental tasks involving public good provision (later resource allocation), redistribution, and stabilization did not leave an easy niche for the provision of merit goods. Merit goods are “private goods” in the sense that their consumption is rival and exclusion from them is easy. Therefore, merit goods can be and often are privately provided on the market, which for many raises the question of why they should be provided publicly. The provision of merit goods also overrules consumer preferences and thus bypasses consumer sovereignty as a normative cornerstone of economic policy (McClure 1968). But this view sanctifies markets as the way to generate a social welfare function: Other ways to do so include collective decisions in representative democratic decision-making arenas.

One argument for the involvement of the government in the provision of merit goods is based on the view that, due to imperfect information, irrationality, or other reasons, people’s preferences regarding merit goods can be ill-informed to serve their own best interests (Head 1966). In this light, overriding the preferences of, for example, deprived groups in the society may benefit them. A second argument treats the provision of merit goods as inkind redistribution that expands the transfer recipients’ consumption of goods that are identified as important by those who are funding the transfers. A third argument reconciles the notion of merit goods with standard welfare economics. It suggests that the consumption of certain goods involves positive (or negative) externalities, which justifies their subsidized (or taxed) provision in the name of maximization of social welfare (Culyer 1971). Yet another explanation, albeit not necessarily a justification, of merit goods is that their provision may enhance the utility of those who impose their “nosy” preferences on others.

A common criticism of public provision of merit goods is that they are inefficient public substitutes for goods that could be provided more efficiently privately. However, on this issue the jury seems to be out. Some studies have concluded that public provision of merit goods is substitutive (diminishing) of private provision of the same goods, while other studies have found that public and private provision are complementary (Fiorito and Kollintzas 2004). This means that public provision of merit goods increases the consumption of privately provided goods. Merit good provision accounts for a significant proportion of the gross domestic product (GDP) and government expenditure in developed countries that have substantial welfare states. Many European countries spent about 9 to 15 percent of their GDP on the provision of merit goods in the 1990s. Merit good provision made up about two-thirds of government consumption, an element of government expenditure that excludes transfers, public investments, and interest payments (Fiorito and Kollintzas 2004). The rest was used to provide public goods. Education and health care are the most significant merit goods from an expenditure point of view. However, their public provision does not necessarily mean public production: Public provision can be based on private production. For example, nonprofit organizations such as the Church of England offer free primary education with state support in the United Kingdom. Similarly, in a number of countries, national health-insurance schemes rely in part on private health-care service producers.

Bibliography:

  1. Culyer, J. 1971. Merit Goods and the Welfare Economics of Coercion. Public Finance 26: 546–571.
  2. Fiorito, Riccardo, and Tryphon K 2004. Public Goods, Merit Goods, and the Relation between Private and Government Consumption. European Economic Review 48: 1367–1398.
  3. Head, John 1966. On Merit Goods. FinanzArchiv 25: 1–29.
  4. McClure, Charles 1968. Merit Wants: A Normatively Empty Box. FinanzArchiv 27: 474–483.
  5. Mill, John Stuar [1848] 1970. Principles of Political Economy. Harmondsworth, U.K.: Penguin.
  6. Musgrave, Richard 1957. A Multiple Theory of Budget Determination. FinanzArchiv 17: 333–343.
  7. Musgrave, Richard 1959. The Theory of Public Finance: A Study in Public Economy. New York: McGraw-Hill.
  8. Musgrave, Richard 1998. Merit Goods. In The New Palgrave: A Dictionary of Economics, eds. John Eatwell, Murray Milgate, and Peter Newman, vol. 2, 452–453. London: Macmillan.
  9. Smith, A [1776] 1937. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Random House.

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