5.5 Merit and demerit goods

Question 1

What is a merit good?

Answer 1

Merit goods suffer from 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

This leads to government intervention

Question 2

When will a merit good operate?

Answer 2

A merit good will operate where social benefit is greater than private benefit

Question 3

Do merit goods have positive or negative externalities and what is the government likely to do?

Answer 3

Positive meaning the government is likely to intervene for the good of society

Question 4

What is a demerit good?

Answer 4

Demerit goods are over provided by the market

These goods produce negative externalities which are deemed to be bad for society

The overconsumption of demerit goods leads to market failure

The government intervene in the market in order to reduce or eliminate the supply of this type of good or service

Question 5

When will a demerit good operate?

Answer 5

A merit good will operate where private benefit is greater than social benefit

Question 6

Do demerit goods have positive or negative externalities and what is the government likely to do?

Answer 6

Negative so the government is likely to intervene to eliminate the use or reduce the consumption of the product

Question 7

What are examples of merit goods?

Answer 7

Education, healthcare, exercise, car insurance and healthy foods

Question 8

What are examples of demerit goods?

Answer 8

Alcohol, tobacco, drugs, fatty and sugary foods