Merit good
The concept of a merit good introduced in economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 by Richard Musgrave
Richard Musgrave
Richard Abel Musgrave was an American economist of German heritage. His most cited work is The Theory of Public Finance , described as "the first English-language treatise in the field."-Life:...

 (1957, 1959) is a commodity
Good (economics and accounting)
In economics, a good is something that is intended to satisfy some wants or needs of a consumer and thus has economic utility. It is normally used in the plural form—goods—to denote tangible commodities such as products and materials....

 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 (e.g. 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
John Rawls
John Bordley Rawls was an American philosopher and a leading figure in moral and political philosophy. He held the James Bryant Conant University Professorship at Harvard University....

 or discussions about social inclusion
Inclusion may refer to:- Metallurgy :*Inclusion , a type of metal casting defect*Inclusions in Aluminium Alloys, solid particles in liquid aluminium alloy- Social inclusion of persons :...

. 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 . 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).

Sometimes, merit and demerit goods are simply seen as an extension of the idea of externalities. A merit good may be described as a good that has positive externalities associated with it. Thus, an inoculation against a contagious disease may be seen as a merit good. This is because others who may not now catch the disease from the inoculated person also benefit.

However, merit and demerit goods can be defined in a different way which makes it different from externalities. The essence of merit and demerit goods is to do with an information failure to the consumer. This arises because consumer do not perceive quite how good or bad the good is for them: either they do not have the right information or lack relevant information. With this defenition, a merit good is defined as good that is better for a person than the person who may consume the good realises.

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. 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).

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.

Public Choice Theory
Public choice theory
In economics, public choice theory is the use of modern economic tools to study problems that traditionally are in the province of political science...

 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 (i.e. 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.
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