Regulators find leading model agencies guilty merit goods definition investopedia forex price fixing. Report on the growth of alternative finance.
Firstly, unlike a private good, the net private benefit to the consumer is not fully recognised at the time of consumption. In the case education, which is widely considered to be a merit good, pupils and students cannot possibly know the specific private benefit to them of getting good grades at school, college or university. They will be well aware of the sacrifice required to study, but will not know the benefits to them in terms of a future job, salary, status and skills. Secondly, while consumption of a merit good also generates an external benefit to others, from which society gains, this is unlikely to be known or recognised at the point of consumption. Given that decisions to consume are driven by self-interest, it is unlikely that this external benefit will be taken into account when the consumer of a merit good evaluates its worth. For example, although it is not possible to know exactly when the benefit will arise, inoculation against a contagious disease clearly provides protection to the individual, and yields a private benefit. There is also an external benefit to other individuals who are protected from catching the disease from those who are inoculated!
However, few would choose inoculation simply to protect others! A number of factors explain the lack of merit goods in a free market economy. For example, there is likely to be considerable information failure in terms of recognising the benefit to themselves, and to others, of regular health checks, eye tests, or visits to the dentist. There may also be considerable time lags in deriving the benefit of a merit good. This is clearly the case with education, where the private benefits may not occur for ten or twenty years after consumption.
However, society needs as many people as possible to be educated and healthy so that all individuals can receive the maximum external benefit. Finally, individuals and families on low incomes are not likely to be able to pay the full market price of merit goods, and will under-consume. For example, to continue to supply private education, tuition fees must be set to cover the full costs of supply. However, private fees are likely to be well in excess of what many low income families could afford to pay. Because of the above, it is likely that merit goods will be under-consumed and under-supplied.
However, the expected marginal private benefit is likely to be much greater than the actual benefit. This is because individual consumers of merit goods fail to perceive the true benefit to them. Indeed, there is an information failure, which results in the consumer under-consuming. Hence, on the graph, the actual marginal private benefit is higher, and to the right of the expected benefit curve. With education, few students will know with any precision the benefit to themselves of being educated, let alone the benefit to others. In other words, there is imperfect information.