Sample Essay On Socially Desirable Merit Good

Merit and Demerit Goods

Merit goods refer to goods, which the society considers to be so valuable that it is imperative for everyone to have them, for instance, education (Mendoza, 2011, p. 278). An example of a merit good in the United Kingdom is education. The UK government provides merit goods for the benefit of the entire society because they would be under-provided if left to private enterprise or the market forces. Merit goods have two essential characteristics: their value is not commonly fully appreciated during consumption, and their use results in positive effects on other consumers.

Graph of merit good

The graph shows that the marginal social benefit of consumption of merit goods is more than the marginal private benefit, meaning that the consumption has a positive impact on the society.
Conversely, demerit goods refer to goods, which can have undesirable effects on the consumers; however, these adverse effects may be ignored or unknown by the consumers, for instance, drugs. These goods usually have negative externalities, for example; their consumption has undesirable effects to a third party. These goods are usually over-consumed in a free market.

Graph of a demerit good

The graph shows that the marginal private benefit of consumption of demerit goods is more than the marginal social benefit, meaning that the consumption has a negative impact on the society

Externalities and the Types of Externalities

An externality refers to a situation whereby a third party who does not directly take part in a transaction incurs a benefit or cost. Externalities arise when third parties to a given transaction experience either positive or negative side effects as a result of transactions between sellers and buyers of goods and services (Zilberman, 2009, p. 1). There are two main types of externalities; positive and negative externalities. Positive externalities arise in an unregulated market, where consumers pay lower prices and consume lesser quantities than the socially effectual outcome. This is demonstrated on the graph below.

Graph showing positive externality

Consumers consume quantity Q' when they pay price P'; however, at that quantity the society would have them pay a higher price. At P' Q,' the marginal cost is much lower than the marginal benefit to society, leading to a burden welfare loss. In general, the socially effectual outcome is to consume quantity Q* and pay price P*. At this quantity and price, the marginal cost to society is equal to the marginal benefit.
On the other hand, negative externalities arise in an unregulated market, where producers do not take responsibility for existing external costs; instead, the society is the one that assumes responsibility. Therefore, producers have much lower marginal costs than they would have. Moreover, the supply curve is shifted to the right of and below the supply curve, which the society faces. Since there is an increase in the supply curve, more of the product is produced and sold than the efficient amount. Consequently, the marginal benefit becomes unequal to marginal cost, resulting in a deadweight welfare loss. The graph below indicates the impact of negative externalities. The red curve represents the marginal cost curve/ supply curve of the society while the black curve represents the industry’s marginal cost curve. Q' is the optimal production quantity; however, the negative externality leads to the production of Q*. The gray region in the graph indicates the deadweight welfare loss.

Graph showing negative externality

Education as a Desirable Merit Good
A desirable merit good is a good, which is deemed to be necessary and has positive externalities to the society. About the issue of education as a desirable merit good, the argument in relation to inadequate information is important. Apparently, some parents are typically ignorant of the long-term benefits, which education might give their children. In the United Kingdom, education is a merit good because the society considers it to be desirable.
Furthermore, education has positive externalities to the society since people who are educated are generally more reasonable, logical, and cultured. The society also believes that educated people are less likely to cause social disorder or commit a crime. Since education is a desirable merit good in the United Kingdom, the society believes that it is imperative for the government to pay for it up to tertiary level.
Education is considered to be a long-term investment decision since private costs have to be paid now; however, the private benefits such as one’s potential of higher earnings over their working life, take quite a while to emerge. The society believes that education provides several external benefits such as rising incomes as well as productivity. Furthermore, it increases the occupational mobility of the labor force that is helpful in reducing unemployment . Beyond doubt, high government spending on education in the United Kingdom gives a stimulus for higher-level research that is likely to add to the trend rate of growth. Besides, the United Kingdom derives some external benefits such as the encouragement of a more cultured and enlightened society .

Direct Provision of Public and Merit Goods

Public goods refer to goods and services where, for any particular output, consumption by existing consumers is not reduced by consumption by additional consumers. Examples of public goods include parks, law, defense, street lighting, etc. Since a marginal cost is not associated with the provision of public goods, it is commonly argued that it is imperative to provide them free of charge. Otherwise those who benefit from them less than the cost of consuming them will not use them. Consequently, there will be a loss of welfare. Indeed, public goods are non-excludable, meaning that once they are provided everyone can consume them; therefore, if they are charged, there will be "free-riding". These goods are not provided by free markets because there is no technique of charging for their consumption; hence, the government must provide or finance them from the taxes collected from everyone.
On the other hand, merit goods refer to products that are generally distributed on the basis of desirability or need, and not the price system since people would acquire the wrong amount of them despite having perfect knowledge about them. Merit goods are supplied by free market; however, not in the right quantity. They are provided by the government as "good for you", for instance, education.

Subsidies

Subsidies refer to direct payments that the government gives producers of goods or services. Governments provide subsidies in order to minimize production cost and maximize the level of production, as well as consumption. The United Kingdom government subsidies merit goods such as education so as to boost their consumption, for the good of the society. In general, subsidies are given to both public and private sectors so as to increase the production of merit goods to the socially optimal level. For example, education is provided by both the public and private sectors, and is considered to be a merit good owing to its enlightening and educative benefits, which the society derives. The government subsidizes education on the view that lack of state assistance to the educational sector would result in an inadmissible small number of learning institutions capable of surviving. The graph below shows how subsidies operate.

Graph showing effect of a subsidy

In the graph, the price of education is obtained by the intersection of the curves S and D at OP, and the equilibrium quantity is obtained at OQ. The distance XY is equivalent to a government subsidy. This subsidy shifts the supply curve to the right; therefore, the market price drops to OP1. Conversely, the quantity demanded and supplied rise to OQ1. This implies that a government subsidy on education promotes education. The expenditure of consumers on education thus rises from OPZQ to OP1YQ1. The area P1RXY signifies the total amount the government spends on subsidizing education. For a government subsidy on education to work, it is imperative for the government to evaluate the value of marginal external benefit, for instance, the positive externality of education to the society and provide a subsidy that is equivalent to this amount.

Education in the Private Sector

Indeed, the private sector has played a key role in promoting education in the United Kingdom. For instance, nonprofit organizations such as the Church of England offer free primary education with state support in the United Kingdom. According to stakeholders of the private sector, education increases the awareness of people regarding scope and opportunities for advancement. Furthermore, it enables them to seize such opportunities (Patrinos & Lewis, 2010). The private sector promotes education in the United Kingdom because self-help is easier for educated people than uneducated people. Moreover, education empowers people with not only the knowledge of their rights but also the capability to keep learning.
The private sector’s entry into the educational sector initially came about in the perspective of professional courses that were the limited professional opportunities for a long time. Those in the private sector realized that there was an increase in the number of people who appreciated and needed education. Some organizations in the private sector offer education for free, for instance, non-profit organizations, while some provide education at a fee. Private entrepreneurs or corporates bear the cost of setting private institutions. In some cases, the private sector provides education so as to help establish a pool of talent, which can be absorbed by the organizations in the private sector. Therefore, private educational enterprises come with economic, social, and industrial pay-offs. The private sector has entered the educational sector to tap the high demand for new courses and has created a totally new educational landscape for students in the United Kingdom. Consequently, students keen to acquire education in their desired fields view privately funded educational institutions as a worthwhile option.
The private sector entered the educational sector to offer a wide variety of educational choices, which match the wide variety of educational interests and needs intrinsic in a more heterogeneous and radically expanded student population (Patrinos, et al., 2009). Without a doubt, the involvement of the private sector in education has helped improve the overall level and diversity of educational opportunities. Besides, it has helped several students in the United Kingdom tap rapidly developing and evolving both local and global career opportunities.

Positive Externalities Arising from Education

Without a doubt, education has positive externalities. Acquiring more education is beneficial to the individual student while having a highly educated labor force is beneficial to the entire economy. Individuals who have acquired high level of education are normally very productive workers. Educated citizens are usually more informed and more active voters. Through educational loans and grants, families can access financial assistance. Public education aids with redistribution. Indeed, all families, despite their level of income, can provide their children with education.
When there are several public schools, which provide mandatory education, every child gets the chance to acquire education and become future leaders. In general, this is a huge positive externality for the society. A society cannot be democratic and stable if there is no minimum degree of knowledge and literacy on the part of the majority of the citizens and if there is no widespread acceptance of certain common set of values. Undeniably, education contributes to both. Consequently, the benefits of the education of a child accrue not only to the child but also to other members of the society (Gruber, 2009, p. 287). Education is very important in the United Kingdom because the current era is knowledge-based and driven by information technology. When the population is educated, it can easily exploit the potential of the emergent opportunities for economic advancement and progress in the globalized environment.

Market Failure

With competition and absence of externalities, markets tend to allocate resources in a manner intended to maximize the available surplus. However, failure to meet these conditions hinders markets from achieving optimum outcome. This is referred to as market failure (Bator, 2009). The presence of a market failure is the reason governments, supra-national institutions, or self-regulatory organizations intervene in a given market. Market failure arises when the mechanism of a free market (the system through which the market forces of supply and demand determine prices as well as the decisions firms and customers make) fails to realize economic efficiency. In other words, during market failure, the market fails to realize the best use of limited resources.

Bibliography

Bator, F. M., 2009. The Anatomy of Market Failure. Quarterly Journal of Economics, 72(3), p. 351–379.
Gruber, J., 2009. Positive Externalities and Education. Public Finance and Public Policy, pp. 287-289.
Mendoza, R. L., 2011. Merit Goods at Fifty: Reexamining Musgrave's Theory in the Context of Health Policy. Review of Economic and Business Studies, 4(2), pp. 275-284.
Patrinos, H. A. & Lewis, L., 2010. Impact evaluation of private sector participation in education, Washington DC: CFBT Education Trust.
Patrinos, H., Barrera-Osorio, F. & Guaqueta, J., 2009. The Role and Impact of Public-Private Partnerships in Education, Washington DC: World Bank.
Zilberman, D., 2009. Externalities, Market Failure, and Government Policy. Department of Agricultural and Resource Economics, pp. 1-16.