The decision to allow embedding or not is something that’s set within the meta data of the font by the font developer. Adobe wisely abides by those licensing restrictions. As Smurf2 said, you can’t embed the font in a Photoshop file, but if the Photoshop file is saved as a Photoshop PDF, the font is embedded into the PDF — at least enough to allow it to be viewed and printed as native, non-rastered vector type. However, to the best of my knowledge the text can’t be changed without installing the font itself on your computer.
As Smurf2 mentioned, well-built fonts contain something called hinting, which is the font’s ability to adjust the shape of its rastered outlines to display a more accurate version of the type on low-resolution screens or lower-resolution output devices where rounding errors can be a problem. Once again, the font designer includes these hints — either manually or automatically — during the font development process. The important thing, though, is the hinting is striped out when the type is converted to outlines or, worse, rastered into the Photoshop image as part of the bitmap.
In addition, there’s an even more important reason for keeping small type in its native vector format, but it takes a little explaining.
A typical image in a document is 300ppi, but that, in conventional printing, is converted into a halftone, which is typically (but not always) about 150 halftone dots per linear inch (lines per inch or lpi). When small type is made up of different screen tints of the process colors, the best resolution you’ll ever get out of that type is a coarse 150-lpi resolution. This is acceptable at large type sizes, but looks really bad at small type sizes. Toss ink registration issues into the mix and it’s always best to avoid small type created from or reversed out of process or spot color mixtures.
If the type prints a solid color, like 100%K or a solid spot color, there is no halftone screen compromising the integrity of the letterforms. Instead, they’re printed as solid objects. Now if you’ve rastered the type into the bitmap of the image file, the best you’ll ever get out of that type is something rendered to whatever resolution the image is. If the image is 300ppi, the rastered type will also be 300ppi, which is an output resolution far lower than an old, crappy laser printer.
The output resolutions of commercial imagesetters and plate setters are far higher and, depending on the output device, upwards of 1200 to 4000 dpi (it takes a microscope to see the dots). When vector artwork is output by the printer, it’s output at these high resolutions which keeps small, solid type absolutely sharp and legible. However, when that type is rastered into the 300ppi image, like I said, all you’ll ever get is the same quality of small type that comes out of a cheap laser or inkjet printer.
Still better, though, is not to put small text into a Photoshop file, then you won’t need to worry about this. It’s best to use InDesign or Illustrator and just avoid setting small type composed of screen tints…