4.1.8.5 Merit and demerit goods Flashcards
What are merit goods?
Goods with positive externalities in consumption.
Examples: Education, healthcare, vaccinations.
What are demerit goods?
Goods with negative externalities in consumption.
Examples: Cigarettes, alcohol, junk food.
Why is classifying goods as merit/demerit subjective?
Depends on societal values (e.g., some view cannabis as demerit; others disagree).
Example: Gambling banned in some cultures but legal elsewhere.
Draw a diagram showing underconsumption of merit goods. Label: MSB > MPB
MSB curve above MPB → deadweight loss between Qₘ and Qₛₒ.
Draw a diagram showing overconsumption of demerit goods. Label: MSC > MPC
MSC curve above MPC → overproduction at Qₘ.
How does imperfect information worsen market failure?
Merit goods: Consumers underestimate benefits (e.g., undervaluing university degrees). Demerit goods: Consumers ignore costs (e.g., smoking’s health risks).
How can governments address merit/demerit goods?
Merit: Subsidies, free provision (e.g., state schools). Demerit: Taxes, bans, advertising restrictions (e.g., cigarette taxes).
Give an example of an externality that isn’t merit/demerit.
Positive: Beekeeping → pollinates nearby farms (not a merit good). Negative: Driving → congestion (not always demerit, e.g., essential commutes).
Why is education a classic merit good?
Private benefit: Higher wages. Social benefit: Skilled workforce, lower crime → MSB > MPB.
How do cigarettes create market failure?
Private cost: Price paid by smoker. Social cost: Healthcare burdens + secondhand smoke → MSC > MPC.
Are all merit goods underprovided equally?
No: Depends on awareness (e.g., vaccines vs. museum visits).
Policy implication: May need stronger intervention for less obvious benefits.
How does this link to behavioral economics?
Bounded rationality: Consumers make poor choices → justifies nudges (e.g., smoking warnings).
