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Wanna Argument?
Taxes - to cut or not to cut?
Providing goods on merit?
Some goods will be provided by a market economy if left to itself, but they may be provided in the wrong quantity. These goods are called merit and demerit goods. Merit goods will be under-provided whereas demerit goods will be over-provided. The government may have to step in and intervene in the market to try to get the optimum quantity made
available. Merit goods are goods which have positive externalities.
These are spillover effects from consumption that will also benefit people other than those consuming the good. An example would be education. If people are better educated then we will become a more productive society and we all benefit. A free market will not take this into account and so may not provide enough education. It may be better for the government to provide the service
as they should take the benefits for society (the external benefits) into account. We can see this in the diagram below:
The optimum equilibrium for society would be where the marginal social cost is equal to the marginal social benefit (Q!). However, a free market left to itself will produce where the marginal private cost is equal to the marginal private benefit (Q^). If there are positive externalities in consumption, a private market will therefore tend to under-provide a good. Merit goods could
cover a wide variety of goods and services provided in the public sector. Health, education and fire and ambulance services could all come into this category. We could leave the private sector to provide them (as many countries do), but we may not get the optimum amount for all of society. Simply providing services to those who can afford them can open up wider pisions in society and
lead to social exclusion of many.
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