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"Education is a Merit Good; The Government Should Pay for Education." Discuss. [25] (Rephrased Economics Question)

“Since education is a merit good, the government should pay for the people’s education up to, and including, tertiary education, such that education is free”. Discuss.  [25]

A merit good can be defined as a good that society deems desirable, or a good that has positive externalities to society. Education is definitely a merit good given that it is desirable to society, and certainly it seems to confer positive externalities to society as educated people are generally more cultured, logical, and reasonable, and are thus less likely to contribute to crime and social disorder. This paper discusses the issue that, since education is a merit good, the government should pay for education up to and including tertiary (university) education. While it is true that education is indeed a merit good and the first part of the statement is definitely true, it does not follow that the government should do more than merely subsidise education. In fact, governments should only provide or pay for public goods which are not produced by the free market, and since education is not a public good it should not be provided free.

Education as merit good – and the government should subsidise merit goods

It can be argued that a good that has positive externalities to society can be considered a merit good. An externality is a third party spill-over effect, or an effect that affects third parties not involved in the production and consumption of the good in question, and can be negative or positive. Positive externalities are positive third party spill-over effects. As people do not consider the positive externalities to society, but rather consider private benefits and private costs, they under-consume merit goods. The government can subsidise merit goods in order to boost their consumption, which is good for society.

Alternatively, a merit good can be thought of in terms of imperfect information – people do not have perfect information about the nature of the good, and thus they misjudge its merits and demerits. Hence, this leads also to the under-consumption of merit goods. The government by providing education at low cost (or even providing education free) can be seen as trying to mitigate this informational failure.

According to the diagram below, there is a divergence caused by the externality between the marginal social benefit (MSB) and the marginal private benefit (MPB), assuming that marginal social cost equals marginal private cost (MSC = MPC). Hence, clearly the government should directly subsidise merit goods, which would shift the MPB to the MSB. In this case, a subsidy here is a government payment directly to the consumer of education, which would shift the demand curve to the right. The famous economist Milton Friedman once suggested that an education voucher could be given to students, which would have the effect of shifting the MPB to the right to eliminate the externality. If, on the other hand, an indirect subsidy was given, meaning a subsidy was given to the producer of education, then the MSC curve would shift to the right.

Economics diagram - what diagram should be drawn here?

The Government Should Not Pay Entirely for Merit Goods

On the other hand, the government should not pay entirely for merit goods. Governments should pay for public goods which are non-rivalrous and non-excludable because public goods cannot be produced by the free market without government intervention, whereas merit goods can be produced by the free market. Non-rivalry is the condition that consumption of a good by one person does not reduce the amount of that same good for another person. Non-excludable is the condition that a consumer cannot be excluded from consuming a good. These two conditions lead to the situation where a free market does not produce public goods because of the free-rider problem and because the allocative efficient outcome leads to marginal cost being zero (MC = 0).

There are also other major issues on having free education, other than the fact that education is not a public good. First, there is the issue of opportunity cost. Opportunity cost is the cost of the next best alternative forgone. The problem is that if resources are devoted to making education free, then there are alternative uses for those resources that are forgone, such as national defence, healthcare, and infrastructural investments. Hence, subsidising education would make more economic sense rather than providing it entirely free. Second, the government is not the only possible provider of education – private agencies or public-private-partnerships (PPP) can also provide education. For instance, in many countries around the world, there are private agencies that provide education for profit.


In conclusion, while the government could possibly provide merit goods, such as education, for free in order to solve the market failure of positive externalities not being taken into account by individuals, and to overcome the informational failures associated with merit goods because people misperceive their benefits, there are other issues that need to be seriously considered like opportunity cost and alternative financing methods such as private provision with some government intervention and public-private-partnerships. However, in my opinion, the most important reason why governments should not provide merit goods is that they are not public goods which are not provided by the free market, and as such market-based policies should be used to encourage a higher consumption of education rather than direct government provision of education.

JC Economics Essays – Tutor's Commentary: This Economics paper was written under examination conditions by one of my former economics students, GSW. Putting yourself into your Economics tutor’s shoes, how would your Economics tutor make this essay even better? Hint: Any good Economics tutor would suggest using properly-labelled diagrams, with the curves moving to demonstrate a point, to make a good economics argument. Having said that, this economics site does not feature diagrams - so what else can be improved on, other than the usual "draw a diagram"? In fact, this economics essay is rather well written, and an excellent example of how a hardworking student from a humble background can learn and improve in his studies! This is a economics good paper. Yet, there are other approaches. How would YOU approach this question? Would you go for a more direct approach, or a more indirect approach, compared to this Economics answer? While I would not have answered this Economics question in this particular way, this approach is still workable and can be utilised to get a good grade in Economics examinations. Thank you for reading, and cheers. 

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