5. Merit and demerit goods

the classification of merit and demerit goods involves …

a value judgement

features of merit goods

social benefit exceeds private benefit

under-provision and under-consumption

positive externalities

features of demerit goods

private benefit exceeds social benefit

over-provision and over-consumption

negative externalitites

cuase of under/over provision of merit/demerit goods

imperfect information

describe the merit good/positive externality diagram

free market equilibrium at Q1, P1 where the private benefit is equal to the cost

social benefit is greater than private benefit

socially optimum allocation where MSB = cost

net welfare loss shown by ABC

describe the demerit good/negative consumption externality diagram

the free market equilibrium allocates resources at q1, p1 where the private benefit = cost

the socially optimum allocation is at A where the social benefit = cost and the externality is internalised

net welfare loss shown by trangle ABC

for a negative consumption externality which curve should be higher MPB or MSB

MPB

where does the welfare loss always point to?

the socially optimum point

how many supply curves in a consumption externality diagram

1 as MSC = MPC