Merit goods

Merit goods are those that would be under-produced from society’s point of view.  Unlike public goods, the private sector would still provide these goods, however they would be produced and consumed in insufficient quantities.  This means that there will be under-allocation of resources to their production and the government needs to encourage consumption and production (e.g. via subsidies).  

Merit goods are typically goods with positive externalities, which includes services such as health, education, libraries, public parks, emergency services and public transport, as well as other important infrastructure necessary for the efficient operation of markets and the proper functioning of society, such as road, rail and telecommunications networks. 

Why is it that markets tend to under-produce these goods?  

An unregulated market will devote too few resources to the production of merit goods because consumers, in general, do not appreciate the total benefits that each service provides to both themselves and society more generally.  In this respect, consumers would tend to spend an insufficient amount of money on these services, which ultimately leads to sub-optimal production levels.  For example, health food can be considered a merit good because the consumption of health food will provide long term benefits for the consumer (such as fewer illnesses) as well as benefits for society more generally (such as less strain on the nation’s health care system).  Without some form of government intervention, some consumers would tend to over-consume junk foods (de-merit goods) and under-consume health food.  In simple terms, these consumers are either ignorant of the long term benefits of health food consumption or lack the discipline to consistently make correct or appropriate choices. Accordingly, governments provide funding to promote healthier lifestyle choices, including government advertising, subsidies (to promote health foods) and indirect taxes (to discourage bad foods).    Community Food Grants are an example of how the government supports the establishment or improvement of community food initiatives, such as farmers’ markets, food cooperatives, food hubs, community gardens and city farms.