Definition of Merit Good
A merit good has two characteristics:
- People do not realise the true personal benefit. For example, people underestimate the benefit of education or getting a vaccination.
- Usually, these goods also have a positive externality.
Therefore in a free market, there will be under consumption of merit goods.
Examples of Merit Goods
- Health Care – people underestimate the benefits of getting a vaccination. If people do get a vaccination, then there will be a personal benefit in protecting against diseases. Also, there will be external benefits to the rest of society because it will help reduce the prevalence of disease in the rest of society.
- Museums – the educational benefit of museums.
- Education – People may undervalue the benefits of studying, and decide to leave school early or not get good grades.
A demerit good has two characteristics:
- A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs.
- Usually, these goods also have negative externalities. If you smoke you harm yourself, but also the smoke negatively affects other people.
Therefore in a free market, there will be overconsumption of these goods.
Examples of Demerit Goods include:
- Smoking – People underestimate health costs or risks of getting addicted.
- Drinking – Health costs to drinkers. Costs to society include more expenditure on health care and policing.
- Taking drugs – Health costs to drug users – people underestimate risks of getting addicted. External costs of more crime.
More on demerit goods
Value judgement on merit goods
Merit and demerit goods involve making a value judgement that something is good or bad for you. Classification is not always straightforward. For example:
- Cannabis is widely considered a demerit good – it contributes to lung cancer and can lead to psychological problems, such as paranoia.
- However, supporters of cannabis might argue cannabis is a harmless drug which can help people deal with physical pain and enjoy life more.
- Supporters of family planning may argue contraception is a merit good because contraception can involve personal costs of unwanted pregnancy.
- The Catholic church views contraception as a sin and may argue it is actually a demerit good because its use encourages sexual promiscuity and undermines family values.