What is the significance of information failure for the consumption of merit goods?

 

1. 

A merit good is one with positive externalities which is excludable, but which will be under produced and overpriced in the market. The socially optimum level of such a good will therefore not be provided, leading to a welfare loss.

This might be because of the nature of the good but could also be because people might not recognise the benefits which arise from use of the good. This could be because the good has a long-term advantage for people which is difficult to compute. A liberal arts degree which gives rise to a love of and familiarity with literature, poetry, philosophy, history, or art, for instance, might enrich a life, encourage mental health benefits such as patience and resilience, and allow for greater productivity and problem-solving over time than, for instance, an MBA

Some industries could be subject to this type of information failure. The education, healthcare, and insurance industries are all predicated upon the possibility of future loss and future gain, for instance, though none can predict the future. Therefore, those who can afford to pay for them are often distinct from those who might benefit from them, and those who need them in fact often cannot access them financially. This leads to a loss of welfare, productivity, and investment as individuals face needless reverses or difficulties.

A lack of information undermines the market system because the price mechanism is an information device, which allocates, indicates, and incentivises. It will become distorted when the discovery of ‘true’ price is hidden. This asymmetry leads to multiple failure, waste, and unfairness. It favours those who can afford to fund ways around the asymmetry, by using consultants or private sources of information, whilst it actively disfavours those who do not start with the advantage of wealth. In such circumstances, individuals through ignorance might actively resist government activity intended to increase the provision of information or merit goods directly. Those who feel that they have all information in this sub-optimal system might also labour under a moral hazard in which they feel more protected than others against, for instance, ignorance or ill-health, when these things could and do strike anyone, often with disastrous consequences.

Markets are sometimes mistaken for each other. The internet, for instance, is a doorway to the greatest compilation of information in human history, but the consequence has not been an information economy. Instead, an attention economy exists, in which people are encouraged to visit sites or to imbibe information which benefits advertisers and provides dopamine ‘hits.’ These do so by relying on sensationalism, distortion, or the satisfaction of addictive political or personal fantasies. The drugs market worked in a similar way in the unregulated nineteenth and early twentieth centuries. During that time, for instance, cocaine and morphine were prescribed by unqualified salespeople for women and children, tired or obese people were put on amphetamines, and soldiers were sustained in some cases by the equivalent of crystal methamphetamine.

The attention economy results in disinformation, generalised stupidity and poor choices, and a disrespect for earned opinion. These outcomes have negative economic and social consequences in terms of policy.

At a less elevated level, information failure results in inelasticity, consumer inertia, and a mismatch of power that then leads to price discrimination and the use of advertising and marketing to worsen irrational choices. These are bad for economies as they reallocate consumer surplus to the profits of companies, which can become oligopolies or monopolies that undermine economic efficiency, waste time and resources, and exploit labour value. As everything has a positive side, they could also provide security of supply and be regulated into the benign consequences of economies of scale by government policy, but this is not a given.