The Economic Rationale for Investing in Children: A Focus on Child Care. Merit Goods Rationales


The classic work in public finance by Richard Musgrave provides most of the framework of rationales for public sector interventions reviewed above. One final rationale for public sector intervention that he added was what he called merit goods.

This type of rationale has generally fallen into disfavor among economists. One economist is quoted in a leading public finance texts as follows:

"The term merit good merely becomes a formal designation for the unadorned value judgement that [the putative merit goods] are good for society and therefore deserve financial support." (Rosen 1999 p. 52)

Economists, qua economists, don't like to be associated with "unadorned value judgments".

However, the other leading public finance textbook describes the merit good rationale as follows:

"Even fully informed consumers may make bad' decisions. Individuals continue to smoke even through it is bad for them Individuals fail to wear seat belts, even though wearing seat belts increases the chances of survivalThere are those who believe that the government should intervene in such cases; the kind of intervention that must be provided is stronger than simply providing information. Goods that the government compels individuals to consume, like seat belts and elementary education, are called merit goods.

The view that the government should intervene because it knows what is in the best interests of individuals better than they do themselves is referred to as paternalism." (Stiglitz 2000 pp.82-87)

In the labor market individuals may make "bad decisions" about what training to undertake.

The merit good argument extends not only to elementary education but to choices about secondary school continuation, post-secondary education and training opportunities. Some would argue individuals may drop out or fail to enroll in training even though it would clearly "be good for them" or that their parents, who know it would be good for their child, are not sufficiently insistent on their pursuing such opportunities. These situations could give rise to "merit good" rationales for more compulsion to undertake these opportunities.

A more tangential merit good case arises with respect to the "free choice" of which programs to enroll in for skills training. Individuals have sometimes been drawn into long-term credit problems because of debts they incurred through enrollment in training programs that promised great results but delivered virtually nothing. The increased emphasis on provision of publicly subsidized training vouchers under the Workforce Investment Act has led to increased concerns in some quarters about the need to limit individual choice in these cases, perhaps through certification or other regulation of the training programs and constraining individual choice in the use of vouchers to regulated programs.

Some would extend the terminology of merit goods to public intervention in certain types of activities that the free market might not support. For example, public intervention in the training and subsidization of health professionals conditional on their serving for a period of time in "doctor shortage areas" in rural settings or inner cities has sometimes been linked to health services as merit goods for the residence of these areas. Similar arguments have been put forward for public intervention to try to increase the proportion of doctors entering into primary care as opposed to specialties such as surgery.

Applications to Child Care of Merit Good Rationales

The "merit goods" rationale is probably the most straightforward to carry over to day care. Children are clearly not able to determine the extent to which time spent in child care may be good for them in the long run. The parents are agents for their child but, in addition to lacking information about the long run benefits of child care(19), they may not be willing to invest in child care. Here, as with elementary education, society may decide that it is in the interests of the child, as well as society as a whole, to use public resources to at least influence, or at the extreme to compel, the parents to invest in child care. As noted in the second quote on merit goods, the rationale is sometimes referred to simply as paternalism.

Public sector intervention on merit good grounds could take many forms: subsidization of the parent's child care costs, subsidization of child care providers so as to lower costs, regulation of child care providers for health and safety reasons which parents might be unwilling to impose (by switching providers and/or paying the higher prices for safe care) or unable to impose.

"Merit good" rationales could be applied both to arguments for investment in quantity and to arguments for investment in quality child care.