Merit good.html

A merit good in economics is a commodity which is judged that an individual or society should have on the basis of a norm other than respecting consumer preferences. One rationale for this is paternalism, that the government or other donor provides such a good on the basis of "merit," because it can better provide for individual welfare than allowing consumer sovereignty.¹ Alternatively, there may be more acceptance for income redistribution in the form of goods, rather than, say, purchasing power². Examples include food stamps, health care, and subsidized housing.

The opposite of merit goods are demerit goods.

Other possible rationales for treating some commodities as merit (or demerit) goods include public-goods aspects of a commodity, imposing community standards (prostitution, drugs, etc.), immaturity or incapacity, and addiction. What is common to all of these is recommending for or against some goods on a basis other than consumer choice.³

In the case of education, it can be argued that those lacking education are incapable of making an informed choice about the benefits of education, which would warrant compulsion (Musgrave, 1959, 14). In this case, the implementation of consumer sovereignty is the motivation, rather than rejection of consumer sovereignty.⁴

Public Choice Theory suggests that good government policies are an under-supplied merit good in a democracy.

A merit good can be defined as a good which would be under-consumed (and under-produced) in the free market economy. This is due to two main reasons:

When consumed, a merit good creates positive externalities (an externality being a third party/spill-over effect which arises from the consumption or production of the good/service. This means that there is a divergence between private benefit and public benefit when a merit good is consumed (ie. the public benefit is greater than the private benefit). However, as consumers only take into account private benefits when consuming merit goods, it means that they are under-consumed (and so under-produced).
Individuals are myopic, they are short-term utility maximisers and so do not take into account the long term benefits of consuming a merit good and so they are under-consumed.^{citation needed}

The concept of merit goods was introduced by Richard Musgrave (1957, 1959).

v • d • e

Types of goods

public good - private good - common good - common-pool resource - club good - anti-rival good

(non-)rivalrous good and (non-)excludable good
complementary good vs. substitute good
free good vs. positional good

(non-)durable good - intermediate good (producer good) - final good - capital good

inferior good - normal good - ordinary good - Giffen good - luxury good - Veblen good - superior good

search good - (post-)experience good - merit good - credence good - demerit good - composite good

References

^ Musgrave, 1987
^ Musgrave and Musgrave, 1973, p. 81
^ Musgrave, 1987, p. 452
^ Musgrave, 1987, p. 452

Richard A. Musgrave (1957). "A Multiple Theory of Budget Determination," FinanzArchiv, New Series 25(1), pp. 33-43.
_____ (1959). The Theory of Public Finance, pp. 13-15.
_____ (1987). "merit goods," ," The New Palgrave: A Dictionary of Economics, v. 3, pp. 452-53.
Richard A. Musgrave and Peggy B. Musgrave (1973). Public Finance in Theory and Practice, pp. 80-81.
Amartya K. Sen ([1977] 1982). "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," in Choice, Welfare and Measurement, pp. 84-106. (1977 JSTOR version)