1.3.3 Merit and demerit goods

Question 1

Merit goods

Answer 1

Goods whose consumption is beneficial to society.

They provide benefits to individuals and society as a whole (due to the positive externalities that result from consumption), but people are usually unaware of the full benefit that merit goods provide.

Question 2

Examples of merit goods:

Answer 2

• Healthcare
• Education

Question 3

Why do merit goods tend to be under-consumed?

Answer 3

• In the free market the positive externalities that merit goods provide are ignored, and production and consumption will be below the socially optimum level. For example, producers and consumers won’t consider the wider benefits to society of a good education (such as having a more productive workforce).
• Due to imperfect information, consumers** don’t always realise the full benefits that merit goods provide**.

Question 4

Are merit goods always welcomed by consumers?

Answer 4

Not always - they can be rejected.

For example, the offer for free vaccinations may be refused.

Question 5

Demerit goods

Answer 5

Goods whose consumption is harmful to the people that consume them.

Demerit goods also have a harmful effect on society due to the negative externalities that result from their consumption.

Question 6

Examples of demerit goods

Answer 6

• Cigarettes
• Alcohol
• Illegal drugs e.g. heroin

Question 7

Why do de-merit goods tend to be over-consumed?

Answer 7

• In the free market the negative externalities that demerit goods cause are ignored, and production and consumption will be above the socially optimum level. For example, producers and consumers won’t consider the wider disadvantages to society of cigarettes (such as smoke-related health issues putting a strain on health care services.
• Due to imperfect information, consumers don’t always realise the harm that demerit goods cause. For example, people might not have enough information on how a harmful drug might affect their health, so their demand for the drug is higher than it should be and the drug is overprovided.

Question 8

Merit goods generate positive externalities. What does this diagram look like?

Answer 8

Question 9

Merit goods generate negative externalities. What does this diagram look like?

Answer 9