Demerit goods Flashcards
1
Q
Define demerit goods
A
Product that would be overconsumed if left to the free market
2
Q
What are 3 reasons to why demerit goods are overconsumed
A
- Imperfect information
- Consumer irrationality
- Addiction
3
Q
Why do demerit goods cause negative externalities in consumption
A
They cause spill over effects that negatively impact society
e.g. more crime, less productivity, damaged family relationships
4
Q
Why is a net-welfare loss caused by demerit goods
A
They are consumed at a higher level than the social optimum
5
Q
What are solutions to the overconsumption of demerit goods
A
- Bans
- Indirect taxation to reduce consumption (sin taxes)
- Minimum price to make the product more expensive
- Education/advertising
6
Q
Why might government failure occur
A
- Consumers may ignore education
- Demand may be inelastic, so tax has little effect
- Indirect tax also effects sensible drinkers
- Inequality caused by regressive tax
- could cause unemployment in alcohol and tobacco industries
