8.5 Merit And Demerit Goods

Question 1

What is a demerit good?

Answer 1

• 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.

Question 2

What are merit goods?

Answer 2

• 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.

Question 3

What is the cause of underprovision or overprovision of goods?

Answer 3

• 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.