A merit good is best described as a good whose consumption provides positive externalities and is under-consumed by the market.

• A. A good with no external effects.
• B. A merit good is a good whose consumption provides positive externalities and is under-consumed by the market.
• C. A good that markets over-consume due to negative incentives.
• D. A good that cannot be publicly funded.

Answer: (B)

The main idea is that merit goods generate positive externalities, so the social benefits exceed the private benefits, and they tend to be under-consumed in a free market because individuals don’t fully value those external benefits. When people don’t account for the wider social gains, the market equilibrium leads to too little of the good being consumed. That’s why merit goods are often targets for government intervention, such as subsidies or free provision, to raise consumption to a level that reflects the true social benefits. An example is education: it benefits the individual but also society through a more skilled workforce and lower crime, so expanding access can improve overall welfare. The statement describes this idea directly, whereas the other options describe situations that don’t fit merit goods—private goods with no external effects, or scenarios where consumption is over rather than under, or where funding is not possible.