De-merit goods

Question 1

What are de-merit goods

Answer 1

De-merit goods= goods the govt feel would be overconsumed if provided by the free market, and are deemed socially undesirable through the political process.

Question 2

Examples of de merit goods

Answer 2

• Sugary drinks

- Tobacco

Question 3

How does over-consumption of de merit goods create market failure

Answer 3

1) Govt judges that the socially optimum level of consumption is lower than the free market equilibrium. This may be caused by information failure eg consumers not realising harmful effects of smoking
2) All demerit goods are capable of creating negative externalities; by reducing the level consumed, govt reduces the impact of these neg. externalities

Question 4

What 3 ways can the government try to reduce consumption of de merit goods and how do they help??

Answer 4

Tax, regulation or prohibition their manufacturing, sale and use.

-Govt is reducing demand through tax (more expensive) and reducing supply with regulation (eg licenses to sell alcohol)

Question 5

Describe the effect of a tax on a diagram??

Answer 5

The tax increases the price of the product from P1 to P2, and shifts the supply curve left because the indirect tax is a cost for suppliers, passed on to consumers in the form higher prices. The quantity falls from Q1 to Q2, by an amount that depends on the price elasticity of demand for the product.

Question 6

How does Ped Elasticity effect the tax revenue raised, and the burden of the tax on consumer/producer??

Answer 6

If the product is very PeD inelastic, lots of tax revenue should be raised without Q falling much, and most of the tax burden falling on the consumer instead of producer.
(opposite applies for a very elastic PeD.

Question 7

What does the effectiveness of a tax/ regulation depend on??

Answer 7

• PeD of product

- Ease of avoiding the tax / how well the regulation is enforced (is punishment worth the benefit of avoidance?)