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A merit good is defined in economics as a good that is under-consumed if provided by the market mechanism because individuals typically consider how the good benefits them as individuals rather than the benefits that consumption generates for others in society. In economic terms, this is because the positive externalities of the good are not internalized by consumers. To increase efficiency, the state may choose to encourage greater production or consumption of a merit good through state provision, regulation, or subsidies to encourage production of the good.

A merit good is a product that society values and judges that everyone should have regardless of whether an individual wants them. In this sense, the government (or state) is acting paternally in providing merit goods and services. They believe that individuals may not act in their own best interest in part because of imperfect information. Consumers and producers require complete information if they are to make efficient choices. In perfectly competitive markets we assume that all agents in the market have perfect information about the availability of goods and services and also the prices charged by suppliers. Consumers can make purchasing decisions on the basis of full and free information on the products that they are buying. In reality, all of us experience information deficits which can lead to a misallocation of resources. Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices. Consumers can never be expected to have a full-informed view about the products they are faced with in each and every market. Searching for information is time consuming and carries an obvious opportunity cost. Likewise, producers do not have full information about the products and prices being charged by their competitors. about the benefits that can be derived. Good examples of merit goods include health services, education, work training programmes, public libraries, Citizen's Advice Bureaux and inoculations for children and students.

Notice here that we are talking about the sorts of goods and services that society judges to be in our best welfare. Judgements involve subjective opinions – and we cannot escape from making some valued judgements when we are analysing and discussing merit goods.

The argument concerning imperfect information is an important one. Parents with relatively poor educational qualifications may be unaware of the full longer-term benefits that their children might derive from a proper education. Because the knowledge of these private benefits is an ongoing learning process, children themselves will tend to underestimate the long term gains from a proper education.

Education is a long-term investment decision. The private costs must be paid now but the private benefits (including higher earnings potential over one’s working life) take time to emerge.

Education should provide a number of external benefits that might not be taken into account by the free market. These include rising incomes and productivity When economists and government ministers talk about productivity they are referring to how productive labour is. But productivity is also about other inputs into production. So, for example, a company could increase productivity by investing in new capital machinery which embodies the latest technological progress, and which reduces the number of workers required to produce the same amount of output. for current and future generations; an increase in the occupational mobility of the labour force which should help to reduce unemployment Officially the unemployed are people who are registered with the government as willing and able to work at the going wage rate but who cannot find suitable employment despite an active search for work. and therefore reduce welfare spending.

Increased spending on education should also provide a stimulus for higher-level research which can add to the long run trend rate of growth. Other external benefits might include the encouragement of a more enlightened and cultured society, less prone to political instabilities and one which manages to achieve a greater degree of social cohesion. Providing that the education system provides a sufficiently good education across all regions and sections of society, increased education and training spending should also open up a higher level of equality of opportunity. The reality is of course that there are very deep and wide variations in educational performance and opportunities across the country.

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