8.5 - Merit and Demerit goods

Question 1

What is a merit good?

Answer 1

Merit good - good for which the social benefits of consumption exceed the private benefits

Question 2

what is an example of a merit good?

Answer 2

healthcare

Question 3

What are the characteristics of a merit good?

Answer 3

• under provided, and under consumed
• non-excludable and non-rival

Question 4

Why are merit goods under consumed?

Answer 4

due to information failures

Question 5

What is an information failure?

Answer 5

occurs when people make the wrong decisions because they do not posses or they ignore relevant information.

Question 6

What is a social benefit?

Answer 6

total benefit of an activity, including the external benefit as well as the private benefit

Question 7

What is the social benefit equation?

Answer 7

social benefit = private benefit + external benefit

Question 8

What is the relationship between merit goods and positive externalities?

Answer 8

when someone consumes a merit good, there is a positive externality (ie walking instead of taking the car helps the planet and less air pollution).
the social benefit to society is greater than the private benefit (health of person) –> MSB > MPB

Question 9

What is the relationship between merit goods and information failures?

Answer 9

long term private benefit of consumption exceeds the short term private benefit of consumption.
- when consuming, households often only take into account the short term benefits not the long term ones

Question 10

What is another example of a merit good?

Answer 10

education and healthcare

Question 11

What is a subsidy?

Answer 11

payment made by a government to producers

Question 12

What does the positive consumption externality and merit good diagram look like?

Answer 12

MPB on bottom, MSC on top and MPC = MSC curve
deadweight loss on top

Question 13

Where is the social optimum point located on the diagram?

Answer 13

point B where MSC = MSB

Question 14

What is the analysis for the positive consumption externality and merit good diagram?

Answer 14

free market provision of merit goods leads to the underconsumption of these goods. producing these goods will benefit society so the government provides a subsidy which reduces the price to P2.

Question 15

What is a demerit good?

Answer 15

goods for which the social costs of consumption exceed the private costs

Question 16

What is involved when deciding if something is a merit or demerit good?

Answer 16

value judgements are always involved

Question 17

What is a value judgement?

Answer 17

assessment to whether something is good or bad for an individual, society or community

Question 18

What is a social cost?

Answer 18

total cost of an activity, made up of the external cost as well as the private cost

Question 19

What is the equation of the social cost?

Answer 19

social cost = private cost + external cost

Question 20

What makes something a demerit good?

Answer 20

consumption from an individual leads to negative externalities

Question 21

how is the private cost of a demerit good measured?

Answer 21

money cost of purchasing the good + any health damage suffered by the person from consuming the good

Question 22

how are the social costs of a demerit good measured?

Answer 22

includes the cost of negative externalities
(ie cost of passive smoking but also includes taxation)

Question 23

What are the main characteristics of a demerit good?

Answer 23

it has a negative consumption externality and it also has a significant information failure

Question 24

What is the relationship between demerit goods and negative externalities?

Answer 24

when person consumes this type of good, a negative externality is produced which means that the MSB < MPB

Question 25

What is the relationship between demerit goods and information failures?

Answer 25

long term effects are ignored or downplayed. long run benefit of consuming is less than the short run benefit of consuming

Question 26

Why is it hard to tell if something is merit or demerit?

Answer 26

because they contain value judgements which can change based off of people's backgrounds or ethical views

Question 27

What does the demerit good and negative externality diagram look like?

Answer 27

MSC = MPC and the MSB on bottom and the MPB on top. the deadweight loss is on the bottom

Question 28

Where is the socially optimal level of consumption located on a diagram?

Answer 28

where MSC = MSB

Question 29

What is the analysis for the negative consumption externality diagram for demerit goods?

Answer 29

because people smoke within a community, the marginal private benefit lies above the marginal social benefit

Question 30

what is the relationship between demerit goods and information failure?

Answer 30

the underconsumption of merit goods and the overconsumption of demerit goods could stem from the information failure. this is because teenagers cannot take into account the long term affects of their actions which leads them to consume more demerit goods.

Question 31

What is a moral hazard?

Answer 31

the tendency of individuals/firms to, once insured against some contingency to behave so as to make that contingency more likely - once insured, do things/consume demerit goods that may have adverse affects in the long run

Question 32

what does a moral hazard look like? (example)

Answer 32

of someone is covered by health insurance, then they may be more likely to take risks or be less careful as they are insured.

Question 33

How does moral hazard lead to free riding?

Answer 33

ie for the example of clean air, when there is reduced accountability, there's less of an incentive to contribute this makes a person less likely to want to look after the planet and more prone to behaviours that will pollute it which in turn leads to free riding as there's an assumption that others will do it for them.