Demerit goods

Consumption of demerit goods can lead to

Negative externalities which cause a fall in social welfare

Demerit goods arise due to

Consumers may be unaware of the negative externalities that these goods create- they have imperfect information

Consumers might not take into account the wider external costs associated with consumption

Firms over supplying goods of cheap prices

The government often seeks to reduce consumption

Welfare loss because

Demerit goods tend to be over consumed by the free market

Strategies to reduce overconsumption

1. Health awareness programmes 

An attempt to overcome the problems of imperfect information 

Make consumers aware of long run costs 

Emphasis on individuals personal responsibility 

2. Taxation of demerit goods 

3. Regulation. e.g. banning some products/ limiting consumption by age 

4. Subsidising healthier substitutes