Merit Goods

I am increasingly persuaded that the idea of “merit” goods should have a role in thinking about free markets.

The foundational moral basis for capitalism I have suggested is the willing assent of market participants to a transaction. The ethics of a transaction – a sale, a hiring – arise from mutuality, the interdependence on the parties that each has something of value to the other and that the exchange is freely entered into.

Thus, any factor which closes down the freely accepted terms of agreement – compulsion such as resulting from monopoly or monopsony, rent extraction by governments and other power imbalances, including ignorance and misrepresentation – detracts from the morality of capitalism.

Yet, what if buyers and sellers agree to do something harmful?

What if neither party cares about the negative externalities of a product? Who is to judge their ethics? God only? The state? Parents of naughty children?

The idea of a merit good creates space for freedom in markets. Merit goods and services should be sold and consumed. Unmeritorious goods and services, on the other hand, may be forced off the market or their sales regulated.

There are two recent examples of interaction between markets and unmeritorious goods:

First, the company Purdue Pharma LP is now in financial difficulty for promoting and selling Oxycontin, an opioid. Oxycontin has serious negative externalities which contributed to the opioid crisis and deaths in the U.S. The company’s revenue will drop below $1 billion this year for the first time. Employees are leaving and a potential bankruptcy filing looms.

Secondly, bullets. Bullets can be used to kill and wound people. What merit is there in that? California has passed a law requiring those who want to buy bullets for their guns to undergo a background check before they can make such purchases. Their freedom to buy has been circumscribed given the potential for harm possessed by the product they desire to have.

The law attempts to reduce the harm done by bullets by limiting their sale to those more likely to have “meritorious” intentions in shooting them.