A2.03.02: Merit and Demerit Goods

Question 1

Define merit goods

Answer 1

Goods that are deemed more beneficial to consumers than they realise. Merit goods are under-consumed and under-produced in the free market

Question 2

Examples of merit goods and what do they generate

Answer 2

• Education
• Vaccines
• Sport Facilities
• These generate positive externalities in their consumption

Question 3

Why do merit goods have imperfect information (information failure and asymmetric information)

Answer 3

Consumers don’t fully understand just how beneficial these goods are for them resulting in:
- Information failure: Info isn’t clear, info is not present or consumers choose to ignore the info
- Asymmetric information: Info does exist but isn’t shared equally between 2 parties

Question 4

What does the merit goods diagram look like

Answer 4

• The same as positive externalities in consumption graph

Question 5

Define demerit goods

Answer 5

• Goods deemed that are deemed more harmful to consumers than they realise

Question 6

Examples of demerit goods

Answer 6

• Ciggs
• Alcohol
• Unhealthy food
• Gambling

Question 7

Why do demerit goods have imperfect information (information failure and asymmetric information)

Answer 7

Demerit goods have imperfect information as consumers have:
- Information failure: Info isn’t clear, info is not present or consumers choose to ignore the info
- Asymmetric Information: More likely to be present in demerit goods as producers may have the information but choose not to share it with their consumers

Generally, demerit goods are over-consumed and overproduced in the free market

Question 8

What does the demerit goods diagram look like

Answer 8

• The same as negative externalities in consumption

Question 9

What does the demerit goods diagram (negative externality in consumption diagram) explain?

Answer 9

• Consumers may make irrational decisions to over-consume demerit goods as they may lack specific information of negative externalities perfectly

Question 10

What does the merit goods diagram (positive externality in consumption diagram) explain?

Answer 10

• Consumers may make irrational decisions that under-consume merit goods because they may lack specific information of positive externalities perfectly