Merit & Demerit Goods

What are Merit Goods?

A good that is good for you and society, but people don’t consume enough of it.

What is a demerit good?

A good that is harmful, but people consume too much of it.

Why are merit and demerit goods based on value judgements?

Because different people (or cultures) have different opinions about what is “good” or “bad”.

Give clear examples of merit and demerit goods.

• Merit: education, vaccinations

• Demerit: drugs, alcohol, gambling

Why can some goods be both merit and demerit?

Because opinions differ.

Why are merit goods under-consumed?

People don’t realise the full benefits (especially to society).

What type of externality do merit goods have?

Positive externalities of consumption

What happens in a free market for merit goods?

Too little is consumed → under-provision → market failure.

What is deadweight loss?

The loss of welfare to society because not enough of the good is consumed.

How does the government fix under-consumption?

• Subsidies

• Lower prices

• Encourage demand (e.g. free education)

Why are demerit goods over-consumed?

People ignore or underestimate the negative effects.

What type of externality do demerit goods have?

Negative externalities of consumption

What happens in a free market for demerit goods?

Too much is consumed → over-provision → market failure.

Why is MPB greater than MSB for demerit goods?

Individuals enjoy it, but society suffers overall.

How does the government fix over-consumption?

• Taxes (e.g. sugar tax)

• Laws/regulation

• Bans or limits

What is the socially optimal point?

Where MSB = MSC

Where is the free market equilibrium?

Where MPB = MPC

What is imperfect information?

When consumers don’t have full or accurate knowledge.

How does it affect merit goods?

People don’t know the benefits → under-consume.

How does it affect demerit goods?

People don’t know the harms → over-consume.