Merit and Non-Merit Subsidies

A subsidy is fiscal support that lowers the cost of a good or service to its producer or consumer. Merit subsidies support consumption considered socially valuable because it produces wider benefits or advances equity. Non-merit subsidies mainly provide private benefits and have a weaker externality or equity justification, particularly when they are broad and untargeted.

Basis of distinction

The classification compares the social benefit of subsidised consumption with its private benefit and fiscal cost. It is an economic and normative distinction, not a rigid division based solely on the sector receiving support.

• Merit subsidies address positive externalities, under-consumption, information failures or inability to pay.
• Non-merit subsidies primarily benefit identifiable users while transferring part of their consumption cost to taxpayers.
• The classification is context-dependent because targeting, beneficiary profile and the size of spillover benefits can change the character of a subsidy.

Typical applications

Elementary education, basic healthcare, nutrition and sanitation commonly justify merit subsidies because their benefits extend beyond the immediate recipient. In contrast, underpriced electricity, irrigation water or other services supplied without regard to income, use or scarcity may contain substantial non-merit components.

• A merit good need not be a pure public good; it may be excludable but still merit support because markets provide or consume too little of it.
• A service can contain both merit and non-merit elements, depending on who receives the subsidy and for what purpose.

Implications for budget policy

Merit subsidies may justify substantial public financing, while non-merit subsidies require closer scrutiny through targeting, appropriate user charges and improved cost recovery.

• Evaluation should consider beneficiary incidence, fiscal burden, leakages and effects on resource allocation.
• Rationalising non-merit subsidies can release resources for socially productive expenditure without requiring the withdrawal of all state support.