Public choice with regard to merit goods: A case study of private bank deposits

Abstract

This paper aims to extend Richard A. Musgrave's concept of merit goods by introducing the notion of a quasi-merit good. By that, the author means a private commodity that acquires merit unjustifiably via a manipulated political process preceding public choice. It is argued that within the original concept of merit goods, specifics are left to public choice in each society. Public choice can, however, be affected by special interests or a misconception, opening the way to public financing for goods of questionable public merit. To illustrate the author's theoretical claim, the paper brings up the case of private bank deposits. It is argued that bank stakeholders are the main beneficiaries of the uninterrupted supply of household savings. Exploiting the public desire for financial stability, bankers press for government intervention, mostly on paternalistic grounds, which are only partly justified. A government-backed deposit guarantee scheme nudges bank depositors to act in a manner beneficial for bank stakeholders, i.e., to keep supplying savings to banks. Private interests are pursued in the first place, which creates grounds for the claim that private bank deposits are a quasi-merit good rather than a genuine one. The proposed concept of quasimerit goods complements the theories of public finance and public choice and potentially applies to other goods and services.