4.1.8.5 - Merit and Demerit Goods

What are merit goods?

A good (e.g. healthcare) for which the social benefits of C exceed the private benefits. Value judgements are involved in deciding that a good is a merit good.

What do merit and demerit goods lead to?

Partial market failure ∵ then it could be argued that the wrong quantity is provided.

Give examples of a merit good.

Education & healthcare. Others could include car seatbelts, crash helmets & museums.

What are usually the characteristics of merit goods?

Merit goods are private goods; they are excludable & rival, even though they are often provided by the public sector.

What does consumption of a merit good produce?

+ve externalities - the community benefits from an educated/civilised pop. A healthy pop. means there are fewer people to catch diseases from.

Why is there market failure with merit goods?

The free market may fail to take into account the +ve externalities of C ∵ the private benefit exceeds the social benefit, ∴ production & C will be below the socially optimal level.
Consumers too may experience imperfect, or just ignore (e.g. vaccinations), info about the LT benefits to themselves of consuming the products deemed to be merit goods

What would happen if educational services were to be provided solely through the market, and at market prices?

Schools would be unlikely to ↓ the P they charge for education, largely ∵ this would wipe out their profits. Free-market provision of merit goods ∴ → under-consumption, & hence to their under-production.

What are demerit goods?

A good (e.g. tobacco) for which the social costs of C exceed the private costs. Value judgements are involved in deciding that a good is a demerit good.

What is 'social cost'?

The total cost of an activity, including the external cost as well as the private cost - (social cost = private cost + external cost)

What does consumption of a demerit good produce?

-ve externalities that harm the wider community.

What would be the private costs of a demerit good?

This can be measured by the money cost of purchasing the good, together with any health damage suffered by the person consuming the good.

What would be the social costs of a demerit good?

These would be the cost of -ve externalities, which include (e.g.) costs imposed on other people from passive smoking and road accidents caused by drunken drivers, together with the cost of taxes raised to pay for the care of victims of tobacco- & alcohol-related diseases.

Give examples of a demerit good.

Tobacco, alcohol, narcotic drugs e.g. heroin & crack cocaine, pornography & prostitution.

Why is there market failure with demerit goods?

The free market may fail to take into account the -ve externalities of C ∵ the social cost exceeds the private cost, ∴ production & C will be above the socially optimal level.
Consumers too may experience imperfect, or just ignore, info about the LT costs to themselves of consuming the products deemed to be demerit goods.

Governments may impose taxes on producers or consumers to reduce the consumption of demerit goods. Why might this not work?

Taxation can be an ineffective & inequitable way of curbing the C of drugs or alcohol, particularly for those affected by addiction.

Governments may ban or limit consumption through regulation. Why might this not work?

Regulation may ↓D, but this can create secondary, illegal, markets (black markets).