4.1.8.5 merit and demerit goods

Question 1

what are negative externalities caused by?

Answer 1

• by demerit goods
• these are associated with info failure, since consumers aren’t aware of the long run implications of consuming the good, and they’re usually over-provided

Question 2

what are positive externalities caused by?

Answer 2

• by merit goods
• these are associated with info failure too, because consumers don’t realise the long run benefits to consuming the good
• they’re under-provided in a free market

Question 3

what does the extent of market failure involve?

Answer 3

• involves a value judgement, so it’s hard to determine what the monetary value of an externality is
• different individuals will put a different value on the externality, depending on their own experiences with pollution, such as how polluted their home town is
• this makes determining government policies difficult, too

Question 4

what does the over-provision of demerit goods and the under-provision of merit goods result from?

Answer 4

• from imperfect information about the long term implications of insuring the good
  eg) education would be under-provided in a free market, because the long term benefits of it aren’t accounted for in society
• not all products that result in positive or negative externalities in consumption are either merit or demerit goods