Actually, everybody wants to enjoy the benefits of social goods be they defense goods, law and order, education, etc.but no one wants to pay for them. At the same time. the consumers do not have any system Of priority in the case of social goods. Again, the tastes, preferences.. etc., Of consumers, are not relevant and the public authorities do not attach any importance to the consumers while producing and supplying social goods. As the people too may not show any interest or any inclination in the production of these goods, the Government has the sole responsibility to decide about how much of these goods should be produced, the method Of production, and the technique Of distribution.
Accordingly, social goods cannot be produced and supplied by the private sector but will have to be supplied by the government. Once it has been decided that the government has to produce social goods, two questions arise immediately.
(a) How much of these goods should be produced and supplied by the government? and
(b) How much should each consumer pay towards the cost of producing the social goods?
Both questions pose real problems, particularly the second question Consumers do not indicate the benefits from the social goods—can a person indicate how much benefit he is getting from the defense or from transport facilities provided by the public sector and in the absence of this information, it is not possible to decide what the consumers should pay according to the benefits they enjoy from the consumption of social goods. As payment towards the cost of production of these goods by the consumers cannot be on voluntary basis, some new method has to be found out which would determine both the supply of social goods and the distribution of their cost.
Social Goods and Cost of Production
An important characteristic of social goods is that their marginal cost maybe or close to zero.
If the marginal cost of social goods is zero or close to zero, the average cost of production of social goods will decline. That is, the larger the volume Of production, the lower will be the average cost of production. The basic reason for diminishing the average cost of production in social goods is the installation of large production capacity. When the productive capacity of social goods is installed, present requirements, as well as fütuie requirements, are generally considered and productive capacity is generally much greater than one which is needed to meet the present demand. It is therefore, possible that there is idle capacity or excess capacity in the production of social goods. It is for this reason that when the production Of social goods is increased, the AC of production will decline, MC too will decline and approach zero. This is the case of the law Of diminishing cost or the law of increasing returns.
Merit Wants :
Certain types of collective wants such as education facilities have been called merit wants since they command overwhelming importance in the attainment of social welfare. The provision of social goods meant to satisfy such wants which will help the economy to achieve a high level of efficiency and welfare. If education is left to the private sector and accordingly educational facilities are supplied by the private sector on the basis of cost of production, the educational facilities will cost so much that many people in the lower-income brackets will not be able to get them. Many intelligent but poor students will be denied educational facilities. This will reduce economic efficiency and social welfare of the community. In the same way, if the hospital facilities are provided by the private sector units, they will be so expensive that only the rich will be able to make use of them and the vast majority of people belonging to middle and lower-income groups will be denied these facilities. It is for this reason that the State should either supply these goods to the community or at least supplement private effort directly or indirectly—directly by Government schools and colleges or indirectly by subsidizing education to make it within the reach of everybody.
The important difference between the satisfaction of merit wants and of wants is that the former calls for interference with consumer preferences. Besides, the provision of merit wants will confer immediate benefits on those groups of people who are in immediate need of them but the community benefits in general as the society becomes more educated and healthier. It is, for this reason, that merit wants must have substantial elements of social wants.
The above analysis of private costs and social costs is based on the objective of efficient allocation Of resources Of an economy between private and social goods with a view to maximise social welfare. The use of price mechanisms to determine efficiency in the allocation of resources assumes the existence of a free market. This type of analysis may be suitable to a predominantly capitalist economy such as the U.S.A. but is not applicable to fully collectivist or partly socialist economy such as India in which market mechanism doesn’t either exist or is not allowed to play a free role.