economics theme 1 : merit and demerit goods

merit good definition

• goods that are good for you

• goods that in a free market system would almost certainly be under consumed

examples of merit goods

• healthcare

• education

• museums

• exercise

why are merit goods likely to be underconsumed in a free market

you wouldn’t say for these goods as many people don’t realise the true benefits of the goods

why does the gov intervene

to encourage increased consumption of merit goods

3 ways the gov intervenes

• legislation - laws e.g. young people must legally stay in education until 18

• subsidies - reducing the price to encourage consumption

• ‘free’ provision - ‘free’ goods e.g. healthcare

demerit goods definition

• goods that are ‘bad’ for you

• goods that are over consumed in a free market

• create negative externalities which leads to a reduction in social economic welfare

examples of demerit goods

• smoking

• alcohol

• drugs

• junk food

• guns

• gambling

why does the gov consider such goods to be bad for society and the economy

• is assumed that many people don’t realise or ignore the cost of engaging in activities such as smoking, duds etc

• these goods have negative externalities

why would the gov intervene

to try to halt, hinder to discourage consumption

2 ways the gov intervenes

• taxation - increases prices e.g. VAT on cigs

• legislation - bans e.g. age restrictions