8.5 Merit And Demerit Goods Flashcards
What is a merit good?
Good such as healthcare for which the social benefits of consumption exceed the private benefits.
(Value judgments are involved in deciding if a goof is a merit good)
What is the difference between merit goods and public goods?
The market may fail to provide public goods(because they are non-excludable and non-rivial) whilst a market does provide merit goods
(But it under-provides merit goods)
What type of market failures do merit and demerit goods cause?
Partial market failure as the wrong quantity is provided by the market
What is an information failure?
Occurs when people make the wrong decisions because they do not possess or ignore the relevant information
(Very often they are myopic which means short sighted about the future)
What are the two important characteristics of a merit good?
-positive externalities in consumption
-information failures (which distort a consumer’s choice on what is the privately optimal level of consumption)
Social benefit def
Total benefit of an activity
=private benefit +external benefit
What do merit goods create?
Positive externalities
E.g healthcare people treated with diseases means the disease is not spread to others
Social benefit> private benefit
Why do people under consume merit goods?
Information failure(don’t realise how beneficial it is)
And they value short term over long term
Is a Merit good non excludable
No because consumption reduced the amount available for others
What is a subsidy?
Payment form the gov or other authority, usually to producers for each unit of the subsided good they produce
(E.g free bus travel for young children)
Under consumption of a merit good diagram
Explain how this diagram conveys underconsumption of a merit good
Privately optimal point of consumption is point A whilst socially optimal point of consumption is point B
Producing Q2 rather than Q1 would add more to society and therefore it is under consumed
How can this market failure of an under-consumed merit good be corrected
Provide a subsidy that reduces price to P2, this would increase consumption to the socially optimal Q2
What is a demerit good?
The social costs for consumption exceed the private costs
E.g tobacco, value judgements involved when deciding if a goofs is a demerit good
Social cost equation
Private cost+external cost
Are demerit goods under consumed or over-consumed?
Over-consumed
How can the private cost of a good be measured?
Price of that good+health damage suffered from consuming
What are the two characteristics of demerit goods?
-the benefit the consumer gets is greater than the benefit to society
-overconsumed
What do demerit goods create?
Negative externalities
How are demerit goods an example of information failure?
Ignore or don’t have access how damaging the good is to the consumer
What do free-market economists and interventionists argue about merit and demerit goods
Free market -people free to make decisions
Interventionists-subsidies needed to nudge people to consume merit goods and not consume demerit goods because of the information failure they possess
Demerit goods diagram(try and draw before looking)?
What is the privately optimum output
Q1 where MPB=MPC
What is the socially optimum output?
Q2 where MSB=MSC
Why is the MSB below the MPB
Because the externalities are in consumption rather than production
How can consumption of this demerit good be reduced?
Indirect tax to reduce consumption from Q1 to Q2
Why would individuals not consume merit goods and consume demerit goods?
They value the short term costs and benefits but not the long term costs and benefits
What type of good has long term consumption> short term consumption?
A merit good
What is a moral hazard?
The tendency of individuals and firms, once insured against some contingency to behave so as to make the contingency more likely
What is contingency?
future event or circumstance which is possible but cannot be predicted with certainty.
How is health I sure add a moral hazard(2 reasons)
Moral hazard-insured people less concerned about their health as they know the bill is covered
Adverse selection-people who have the highest health risks are most likely to but health insurance (private health companies refuse to give insurance to these people therefore it is market failure)
What is adverse selection?
when sellers have information that buyers do not have, or vice versa, about some aspect of product quality
