The concept of a merit good introduced in economics by Richard Musgrave (1957, 1959) is a commodity which is judged that an individual or society should have on the basis of some concept of need, rather than ability and willingness to pay. The term is, perhaps, less often used today than it was in the 1960s to 1980s but the concept still lies behind many economic actions by governments which are not performed specifically for financial reasons or by supporting incomes (eg via tax rebates). Examples include the provision of food stamps to support nutrition, the delivery of health services to improve quality of life and reduce morbidity, subsidized housing and arguably education.

In many cases, merit goods provide services which it is argued should apply universally to everyone in a particular situation, a view that is close to the concept of primary goods found in work by philosopher John Rawls or discussions about social inclusion. On the 'supply' side, it is sometimes suggested that there will be more support in society for implicit redistribution via the provision of certain kinds of goods and services, rather than explicit redistribution through income ^[1]. Alternatively, it is sometimes suggested that society in general may be in a better position to determine what individuals need (such arguments are often criticised for being paternalistic, often by those who would like to reduce to a minimum economic activity by government).

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. A common element of all of these is recommending for or against some goods on a basis other than consumer choice.^[2] However, there is no reason why governments should not consult their populations on such issues as they increasingly do in a number of economic contexts (e.g., development planning by the World Bank or resource allocation in health systems using information on health-benefits).

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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.^[3]

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:

1. 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).
2. 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]}

v • d • e Types of goods public good - private good (includes household goods) - 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 - neutral good - ordinary good - Giffen good - luxury good - Veblen good - superior good search good - (post-)experience good - credence good merit good - demerit good composite good intangible good

[edit] References

• 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)