An alternative way to model merit good arguments

∂Zuh (z,x,y) y^hμ (i = 2,3) and the adding up condition ^d-+qχ ∂χ^h+qy^dyh = -x^h,
this expression can be rewritten as

get

- ^dW ` X λ^he^gh ½ a x^h - Uh^h μh δ^{h q}x^x + _ε^h ∙1 + δ^h qy^y ^∩ ¾   (27)

qx ∂t  ' / _v ^{λ u}1 ^qx^{x μy}  ^^εxx^δxz z_h  ^{+ ε}yx  ^{1 + δ}yz zh j J'  ⁽²7)

Similar operations lead to an analogue expression for — q_y ∂∂W :

-qy ^dwW ` X ^λh^u,9gh {''"∙' y^h - μy^h (^εhy ^δhz qz^χ^^+εhy

with similar definitions for ε^h_xy and ε_y^h_y. Notice how the existence of a (de)merit
good argument corrects both MC expressions in a similar way.

Writing μy^h = ηq_yy^h, the curly bracket terms can in principle be calculated
using expenditure data (expenditures on x and on y, and expenditures on x and
y relative to z ) and uncompensated price and quantity elasticities. If these elas-
ticities are not available at the household (or income decile) level, they can as
an approximation be replaced by the aggregate elasticities. One can then pro-
duce different rankings of the marginal costs, for different values of the (de)merit
parameter η .

7 Discussion and concluding remarks

In this paper, I have questioned the scaling approach proposed by Besley (1988)
to model merit good arguments on the ground that it often leads to counterin-
tuitive policy prescriptions. I have proposed a different approach which directly
interferes with the marginal willingness to pay for a (de)merit good.

Which approach to choose? If one is convinced that a (de)merit good argu-
ment should at least in a first best world precribe the subsidisation (taxation)
of that good, then the approach presented here meets this criterion better than

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