Demerit goods and negative externalities Flashcards
Define demerit goods
A demerit good is a good which when consumed generates costs beyond those borne by the consumer
Social cost
the total cost to society
Private cost
Private costs are the costs facing individual decision-makers based on actual market prices
External cost
a cost not included in the market price of the goods and services being produced, i.e. a cost not borne by those who create it.
Why is social cost greater than private cost for demerit goods
This is because when individuals consume demerit goods it releases negative consumption externalities onto society.
Negative externalities in consumption
This occurs when consuming a good causes a harmful effect to a third party. In this case, the social benefit is less than the private benefit
Negative externalities in production
Negative production externalities occur when the production process results in a harmful effect on unrelated third parties. Private cost is less then social cost
why demerit goods are over consumed and produced in free markets
-bounded self control (addictive)
-imperfect information
-short termism
draw a diagram for negative externalities in production
draw a diagram for negative externalities in consumption
advantages and disadvantages of the Nudges aimed at reducing the consumption of demerit goods
+Behavioral change
+Cost-effective
+Freedom of choice
+Easy implementation
-Ethical concerns
-Effectiveness limitations
-Potential for unintended consequences
-Lack of long-term impact
advantages and disadvantages of Legislation and regulation aimed at reducing the consumption of demerit goods
+Clear rules
+public interest protection
+Uniform standards
-compliance costs
-inflexibility
-regulatory capture
-could force the good into the shadow market
advantages and disadvantages of Specific Taxation and regulation aimed at reducing the consumption of demerit goods
+Behaviour change
+Revenue generation
+Internalize external costs
+Incentive for alternatives
-Regressive impact
-shadow market evasion
-Political challenges
advantages and disadvantages of Subsidies on alternatives
aimed at reducing the consumption of demerit goods
+Promotes alternatives
+Increases affordability
+Stimulates market
-Costly
-Market distortion
-Sustainability challenges
-Risk of misallocation
Use a demand and supply diagram to show the impact of specific tax on the price and quantity sold of a demerit goods. (show the tax revenue)
