3.1.5.5 MERIT AND DEMERIT GOODS

Define merit good

A good or service that is beneficial for society (goods that the government feels we should all benefit from)

Are merit good under or over consumed? Why?

Tend to be under consumed in a free market as people do not know the long-term benefits of

Examples of merit goods

Education, healthcare, vaccines, public libraries, clean energy

Diagram of merit goods and market failure

Why has healthcare spending increased since 2000?

An aging population, the increasing costs of medical treatments, lasting demand due to COVID

Define demerit goods

A product or service that generates harmful effects on both the consumer and society, they are considered socially undesirable (the government feels we don’t benefit from these)

Are demerit goods under or overconsumed? Why?

Usually overconsumed

what are the two traits of demerit goods?

1. Negative externalities (on third parties such as NHS)

2. Information failure

Give an example negative externalities on third parties from demerit good?

Smoking - effects lungs - need healthcare - creates a busier NHS

What prime minister created smoking bans?

Tony Blair

What does information failure mean in terms of demerit gods?

Consumers either do not realize or do not know the detrimental consequences

Give some examples of demerit goods?

1. High caffeine energy drinks

2. High fat, sugar and high salt foods

3. Violent films and games

4. Hands free cell phones in vehicles

5. Alcohol fraud and binge drinking

6. Tobacco products

Why has smoking decreased in the UK?

Indoor smoking bans, tac increases in tobacco products, rise of vaping, strict marketing restrictions (packaging)

Which income families is smoking the most common on?

Lowest 10% of households (incomes)

Why do lower income households tend to spend the most on smoking?

For these individuals tobacco often serves the primary coping mechanism for financial hardship (despite it diverting funds from necessities)

Why has a cigarette use risen in the UK?

Adults smokers are seeking a less harmful alternative, and youth/non-smokers our attract attracted to the technology/modern branding

So are E cigarettes (vapes) a demerit good? Why?

Yes - they are addictive and users underestimate the long-term health risks

What is asymmetric information a form of?

Market failure

Diagrams for demerit goods

Are demerit goods over/under consumed or produced?

Overconsumed and overproduced if left to the free market

What type of goods do people pay exercise duty on?

Petroleum, alcohol

What is exercise duty based on?

Volume (per litre)

What is the current VAT level?

20%

Do merit goods provide positive negative externalities to society?

Positive

Explain uncertainty

The outcomes of an action are unknown

Explain moral hazard

This occurs after a transaction or agreement has taken place

It happens when one party takes more risks because they know the cost of those risk will be born by someone else

Give an example of moral hazard

A person with full car insurance may drive less carefully as they are protected from the financial loss of an accident

Explain adverse selection

This occurs before a transaction due to asymmetric information, the party with less information ends up making a deal with the wrong person

Why may Banks take more risks?

They know the government would bear the risk for them

Why may people take more risks in related to their health?

As they know the NHS is available

If property is a private good, how does this affect the property rights?

Owners hold rights, allowing them to prevent others from using the good

If property is a public goods, how does this affect the property rights?

There are no rights which makes it non-excludable and create a free rider problem (where individuals benefit from a resource without paying for it)

What is the tragedy of the Commons?

Where individuals act independently, according to their own self interest depleting a shared resource

Give an example of the tragedy of the commons

Because no one owns the resource there's no incentive to protect it (eg. Clean air and international fisheries)

So everyone rushes to use as much as possible before others do this leads to the eventual destruction or exhaustion of that resource