8.5 Merit and Demerit Goods

What is merit goods

A good that is under-consumed in the free market because people underestimate its benefits

A demerit good

A good that is over-consumed because people underestimate its harms

How do merit and demerit goods cause market failure

Consumers make poor decisions due to imperfect information, leading to under-or over consumption and a misallocation of resources

How can merit and demerit goods be related to externalities?

Merit and demerit goods may be subject to positive or negative externalities in consumption, meaning their use affects third parties. Merit goods create positive externalities, while demerit goods cause negative externalities