8.5 Merit And Demerit Goods Flashcards
1
Q
What is a demerit good?
A
- Negative externalities are caused by the consumption demerit goods.
- These are associated with information failure, since consumers are not aware of the long run implications of consuming the good.
- They are usually overprovided bu the free market
- For example, cigarettes and alcohol are demerit goods.
- The negative externality to third parties of consuming cigarettes is second-hand smoke or passive smoking.
2
Q
What are merit goods?
A
- Positive externalities are caused by the consumption of merit goods.
- These are associated with information failure too, because consumers do not realise the long run benefits to consuming the good.
- They are underprovided in a free market.
- For example, education and healthcare are merit goods.
- The positive externality to third parties of education is a higher skilled workforce.
3
Q
What is the cause of underprovision or overprovision of goods?
A
- The over-provision of demerit goods and the under-provision of merit goods may result from imperfect information about the long term implications of consuming the good.
- For example, education would be under-provided in a free market, because
the long term benefits of it are not accounted for in society. - Not all products that result in positive or negative externalities in consumption are either merit or demerit goods.