Merit and Demerit Goods

The concepts of merit goods and demerit goods are closely linked to information failure — the idea that consumers do not always have full knowledge of the true costs and benefits of their consumption choices. Unlike public goods, which are not provided by the market at all, merit and demerit goods are provided by the market, but at the wrong quantity. Merit goods are under-consumed and demerit goods are over-consumed relative to the social optimum.

Richard Musgrave (1959) introduced the concept of merit goods in his influential book The Theory of Public Finance. He argued that certain goods should be provided at a level beyond what the free market would deliver, because individuals fail to appreciate their true value.

Key Definition: A merit good is a good that is under-consumed in a free market because individuals underestimate the private and/or social benefits. A demerit good is a good that is over-consumed because individuals underestimate the private and/or social costs.

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Why Are Merit Goods Under-Consumed?

Merit goods are under-consumed for two main reasons:

1. Information Failure