8) Evaluate the consumption/production of demerit goods - MMT Flashcards
What are demerit goods?
Are goods and services which tend to be overconsumed as (due to information failure) consumers overestimate the benefits of consuming them
The free market will allocate resources at a point where…
Marginal Social Benefit is lower than Marginal Social Cost
What are the main examples of demerit goods?
Alcohol, cigarettes, drug addiction, gambling addiction etc
Who are demerit goods consumed by?
Mainly consumed by consumers, individuals and households
Who are demerit goods produced by?
Businesses
Are breweries who make beer harmful?
Not necessarily that harmful, however some producers (ie sellers) of demerit goods, such as pubs, betting shops and drug dealers may generate significant negative externalities of production
Are demerit goods identical to negative externalities of production?
They are similar but not identical!!
What is the difference between demerit goods and negative externalities of consumption?
- Demerit goods are considered to be over-consumed due to the harm they cause to those consuming them, smokers smoke too much due to information failure regarding the long term harm is found them
- Negative externalities cause harm to 3rd parties, not necessarily those who consume them
What is the extent of overconsumption depend on for demerit goods? (Talk about elasticity of demand for the good or service)
Most demerit goods are potentially addictive, meaning that they will be price and income inelastic. The more inelastic demand for these products the more over consumption there is likely to be. If the government can make their demand more elastic, over consumption will fall
What is the extent of overconsumption depend on for demerit goods? (Talk about elasticity of demand for cigarettes)
With cigarettes for instance, the government piles enormous taxes on to the price of a pack of cigarettes. By comparison, less harmful substances like vapes have low taxes on them. Making cigarettes more price elastic compared to vapes will reduce over-consumption
What are the key questions for evaluation for demerit goods?
1) how much will they be overconsumed? By how much will the MSB for demerit goods be below the MSC?
2) what is the impact on society of the overconsumption?
The impact on society of over-consumption of demerit goods may depend on the level (size) of overconsumption, explain this:
If 100,000 people are drinking too excess then it’s bad for the economy. If 5 mil are drinking to exceed that could have catastrophic implications for the economy and public services should as the NHS and police
The impact on society of over-consumption of demerit goods may depend on the overseas relativity of overconsumption, explain this:
For example, if the UK has 10,000 excess drinkers our economy might underperform, but if an equally sized country like France has 1 mil excess drinkers then the foreign companies might think that the UK is a better country to invest their money than France would be
How could the production of merit goods: eg betting shops or casinos make the problem of demerit goods worse?
They are a harmful producer in that their existence might encourage more consumption, overproduction of betting shops or possibly pubs in the city centre may make the problem of demerit goods worse (however this is really a negative externality of production)
The impact on society of over-consumption of demerit goods may depend on merit goods, the extent of this might depend on government failure (Politicians), evaluate:
For example, over the years many politicians have accepted illicit payments in order to ensure that permission is given for these premises to open in locations they want
