Economics – Classification of goods and services | e-Consult
Classification of goods and services (1 questions)
A merit good is a good or service whose consumption is considered beneficial to society as a whole, even if the individual consumer does not fully benefit from it. This means the private benefit to the consumer is less than the social benefit. Examples include education, healthcare, and public libraries.
Markets often under-supply merit goods because of the difference between private and social benefits. This leads to a positive externality. The diagram below illustrates this:
| Cell |
| Private Marginal Benefit (PMB) |
| Social Marginal Benefit (SMB) |
The SMB lies above the PMB, indicating a positive externality. The market equilibrium quantity (where PMB = cost) is less than the socially optimal quantity (where SMB = cost). This results in under-provision by the market. The government intervention, such as subsidies or direct provision, aims to move the market equilibrium closer to the socially optimal level.
Diagram (would be included here - imagine a standard supply/demand diagram with SMB above PMB)