Firstly, unlike aprivate good, the net private benefit to the consumer is not fully recognised at the time of consumption. Net private benefit is the utility from gained from consumption less any private cost incurred, and equates to netconsumer surplus. 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. Therefore, with education, as with other merit goods, there is a significantinformation failurein terms of expected benefits.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, an individual student is generally not motivated to study hard in order to benefit others later in life, although everyone associated with them will benefit from their education in some way. Beneficiaries include future employers and all those who consume the products supplied their employer, their family, and friends. The better job they obtain, the more tax they will pay, and the greater the benefit to those who receive welfare benefits and transfers. However, putting a value on these external benefits is impossible, especially at the point of learning.HealthcareHealthcareis also regarded as merit good. 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!

Definition of Merit Good:A merit good has two characteristic: People do not realise the true benefit. For example, people underestimate the benefit of education or vaccinations. Usually these goods have positive externalities.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 external benefits to the rest of society because it will help reduce disease in the rest of society. Museums the educational benefit of museums. Education People may undervalue benefits of studying.Demerit Good:A demerit goods has two characteristics:1. A good which harms the consumer. For example, people dont realise or ignore the costs of doing something e.g. smoking, drugs.2. Usually these goods also have negative externalities.Therefore in a free market there will be over consumption of these goods.Examples of Demerit Goods include: Smoking Drinking Taking drugs

What are merit goods?Merit goods are goods or services that have significant external benefits to society if they are produced and consumed.However, many people in societywill not consumemerit goodsbecause the private sector charges too high a price that they can afford or are willing to pay. As a result,if it was left to the private sector,merit goodswould be under produced and under consumed. The government will usually intervene and provide merit goods free of charge, or subsidised, so that everyone can consume them. Consequently society will be better off as a whole due to theincrease inexternal benefitscreated bymerit goods.For example, education is considered as a merit good. When people are educated they bring wider benefits to society in terms of lower crime, higher productivity in the economy and potentially higher taxes from employment.However, the firms who sell education dont care about these benefits, they only care about the fees they receive from people paying for education. Furthermore, the people who want to be educated dontcare about the wider benefits from being educated, they just care about the benefits they receive such as better job prospects.As a result, the firms that sell education sell it at too high a price that a lot of people can afford or are willing to pay. This is why the government has stepped in and created state schools so people can be educated for free and society can receive the external benefits that come with it.

Key termsUnder production This is when a good or service has significant external benefits to society and therefore it is under produced by the private sector. Healthcare is an example of a service that is under produced by the private sector and this is why it is it is also provided by the government.Social benefit This is the total benefit of producing goods and services. Social benefit is calculated by adding up the private benefits and external benefits of a transaction.External benefits These are the benefits of a firm or individual using a product that are felt by third parties i.e. the general public or the environment.Market failure This is a situation when the free market system leads to an inefficient allocation of resources. An example of a market failure is an externality.