A merit good
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
(Musgrave, 1987). Alternatively, there may be more acceptance for income redistribution
in the form of goods, rather than, say, purchasing power
(Musgrave and Musgrave, 1973, p. 81). Examples include food stamps
, health care, and subsidized housing.
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 (Musgrave, 1987, p. 452).
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 (Musgrave, 1987, p. 452).
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.
The concept of merit goods was introduced by Richard Musgrave (1957, 1959).
- 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 ( 1982). "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," in Choice, Welfare and Measurement, pp. 84-106. (1977 JSTOR version)