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Saturday, January 29, 2011

Merit Goods

Merit goods are goods that would be provided in a free market system, but would almost certainly be
under-provided. Take the case of education. If there were no state education provided at all, there would still be private schools for those who could afford them, and indeed many new private schools might open. However, there would not be nearly enough education provided for everyone to benefit. This happens because the market only takes account of the private costs and benefitsLook up Private Costs and Benefits in glossary. It does not take account of the external benefitsLook up External Benefits in glossary that may arise to society from everyone being educated. For this reason, merit goods will be under-provided by the market.

If the private sector won't provide these goods in sufficient quantity, then the only way more will be provided is either if the government encourages firms to produce more (perhaps by subsidising the good or service) or if provides them itself. A significant proportion of government expenditure arises from the government providing merit goods. The main examples are:

  • Education
  • Health
  • Fire service

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