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I just came across the concepts of merit and demerit goods for the first time, in the Cambridge A-level economics syllabus. I wasn't sure what they were.

Is a merit good simply a good that has positive 'internalities' (benefits that the consumer is unaware of)?

And similarly, is a demerit good simply one with negative 'internalities' (costs that the consumer is unaware of)?

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Richard Musgrave (1957, 1959) invented the term. My interpretation of what he says (below) is that merit goods are simply goods that the "community" deems desirable, while demerit goods are those the "community" deems undesirable.

He (1987) writes that the concept (of merit goods) is "best applied where individual choice is restrained by community values" ... "Community values ... give rise to merit or demerit goods" ...

Such goods are where "community values" act "as a restraint on individual choice". The "evaluation of a good (its merit or demerit) derives not simply from the norm of consumer sovereignty but involves an alternative norm."

  • Examples of merit goods are "Concern for maintenance of historical sites, respect for national holidays, regard for environment or for learning and the arts."
  • Examples of demerit goods are drug use and prostitution because they are "offences to human dignity (quite apart from potentially costly externalities)."

P.S. There is of course the difficult question of who or what exactly the "community" is. If I may add my humble opinion, all of this sounds very illiberal and even mildly fascist. Which is perhaps why this concept hasn't been much taken up by mainstream economics.

P.P.S. The above is merely Musgrave's interpretation. As Musgrave himself says:

The concept of merit goods ... has been widely discussed and given divergent interpretations ... it is thus difficult to provide a unique definition.

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  • $\begingroup$ The defining characteristics of fascism are militarism, nationalism, violence, and typically anti-semitism too. It's not clear how merit goods have anything to do with that. $\endgroup$ – 410 gone Feb 3 '16 at 9:15
  • $\begingroup$ Perhaps authoritarian would be a better word (than fascist). $\endgroup$ – Giskard Feb 5 '16 at 11:09
  • $\begingroup$ I've rearranged my answer so that the offending bit is more clearly stated (in a postscript) as simply being my opinion. I stand by my phrase "mildly fascist" to describe the notion that there is a "community" whose preferences can somehow supersede the individual's. In that sense then, it is true that I could also have used "authoritarian" or "mildly communist". $\endgroup$ – Kenny LJ Feb 6 '16 at 2:01
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No, a merit good is not simply a good with benefits that the customer is unaware of. That imperfect information can be part of it, but it's only one part of the story.

The benefits may be externalities. Or they may be priced in, but the benefit time is so long that customers' hyperbolic discounting means they would never be realised without external intervention.

A merit good does have some characteristics of normal private goods: there is some scarcity; and a non-zero marginal cost. And it has some characteristics of public goods: the market on its own fails to deliver anything close to economically efficient quantities; and intervention is required to mitigate this.

Merit goods are not a superset of goods with positive externalities; some goods with positive externalities are public goods, not merit goods.

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  • $\begingroup$ So would you say that {Goods with positive externalities} ⊂ {Merit goods}? $\endgroup$ – Kenny LJ Jan 31 '16 at 8:15
  • $\begingroup$ No, I wouldn't. For example, some goods with positive externalities are public goods, not merit goods. $\endgroup$ – 410 gone Jan 31 '16 at 10:42

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