Studied by 4 peopleWhat is a merit good?
one that is deemed to be beneficial for society but is under-provided by the market.
Therefore, the market fails to fully supply that good to meet the needs of society.
Merit and demerit goods rely on value judgements
When will a merit good operate?
where social benefit is greater than private benefit.
There is a positive externality from providing the good, so the government is likely to intervene for the good of society and increase supply.
What do merit goods suffer from? What does this lead to?
under provision in the market Consumers lack perfect information and would under-consume products that society believes would benefit them
The under-consumption of merit goods leads to market failure
The government intervene in the market in order to increase the supply of this type of good or service
What are examples of merit goods?
Vaccinations: When individuals get vaccinated, they protect themselves from disease, but they also contribute to herd immunity, reducing the risk of disease transmission within the community.
Clean energy: The use of clean and renewable energy sources, such as solar or wind power, can be considered a merit good because it reduces carbon emissions and air pollution, benefiting society in terms of reduced environmental damage
Public libraries: While individuals benefit from using libraries, they also contribute to a more literate and informed society.
Draw the diagram for merit goods
The good/service is seen to provide benefits to society over and above those to the individual consumer i.e. there is an additional external benefit of providing the good.
Individuals will only consider their own private costs & benefits and demand Q of the good.
However, society would benefit to a greater extent if the demand for merit goods is higher leading to a quantity at Q1.
The additional benefit/positive externality can be measured by the blue shaded area.
What’s a demerit good?
one that is deemed to be bad for society but is over provided by the market.
A demerit good will operate where private benefit is greater than social benefit.
The over-consumption of demerit goods leads to market failure
There is a negative externality from providing the good so the government is likely to reduce or eliminate the supply of the good for the benefit of society.
What are examples of demerit goods?
High Caffeine Energy Drinks
High-fat, high- sugar & high- salt foods
Violent films and games
Hands-free cell phones in vehicles
Alcohol fraud and binge drinking
Tobacco products
Draw the diagram for demerit goods
The good is seen to be bad for society and is over-consumed by the market.
Individuals will only consider their own private costs & benefits and demand Q of the good.
However, society would benefit to a greater extent if the demand for merit goods is lower leading to a quantity at Q1.
This negative externality can be measured by the blue shaded area.
What is Perfect knowledge or perfect information?
Perfect knowledge or perfect information is a theoretical concept
which occurs when all consumers in a market are fully aware of price, quantity available and all other relevant information for all products when making buying decisions.
What is Information asymmetry?
occurs when some parties in a transaction have more information regarding the product than others.
Example of perfect information
Gina goes to buy a diamond. She has perfect knowledge about diamonds: she knows how to test for originality, their price per carat, size, colour, and cuts.
In this case, the seller won’t be able to sell her a diamond at a supernormal profit, because Gina wouldn’t purchase it.
Gina will be able to rationally choose the right diamonds at the right price.
What is information failure?
a type of market failure where consumers or producera
do not have perfect knowledge
have asymmetric knowledge
means that there is imperfect information
Without having full information about a product, it is difficult for consumers and producers to make decisions regarding price, quality and other relevant factors when buying and selling
Example of imperfect information
Sarah, who doesn't know much about diamonds, will go to a diamond merchant with imperfect information.
She will be unaware of the price and quality characteristics of diamonds.
She will trust the seller and could buy a diamond at a significantly higher price than the market price.
Therefore, she will make an irrational choice due to imperfect information
What can imperfect information lead to?
the under provision of merit goods and the over provision of demerit goods as people are ill-informed regarding the benefits or other wise of such goods
Note
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