Merit and Demerit Goods

Question 1

Merit goods

Answer 1

• Merit goods are goods and services the government feel that people will under-consume, and which might be subsidised or provided free at the point of use
• Both the state and private sector provide merit goods
• With merit goods individuals may not act in their own interest because of imperfect information. I.e. they don’t fully understand the private benefits of their consumption. Information failure is an important aspect of the merit goods issue
• Consumption of merit goods is often argued to generate positive externalities - where the social benefit from consumption exceed the private benefit
• A merit goo is a product that society values and judges that people should have regardless of their ability to pay

Question 2

Examples of merit goods

Answer 2

• Health programmes
• Early years education e.g. nursery provision
• Subsidised bike schemes
• Public libraries/ community spaces
• Museums and galleries
• Free school meals/ nutritional advice

Question 3

Education & health care as merit goods

Answer 3

• Education and health are both merit goods because they have positive externalities in consumption

Education spending
- May increase the skills and productivity of workers leading to lower unit costs
- Improvement in human capital will lower structural unemployment
- More innovation/ competitiveness

Education spending evaluation arguments
- Effectiveness of extra spending has been questioned
- Money might be better spent targeting certain groups or ages

Health care spending
- Improved health boosts the labour supply
- Will also increase productivity
- Lessens risk of relative poverty
- Long run - lower NHS costs/ sick pay

Health spending evaluation arguments
- Better health results can be achieved without increase in funding
- Will lower income families get improved access to NHS care

Question 4

De-merit goods

Answer 4

• De-merit goods are thought to be bad for you
• Consumption can lead to negative externalities
• The social costs of consumption is higher than the private cost
• Consumers may be unaware of the negative externalities these goods create - for example they have imperfect information about long-term damage to their own health
• Governments may decide to intervene in the market for de-merit goods
• Many economist argue that government intervention can be ineffective and inequitable way of curbing the consumption of, drugs and gambling particularly for those affected by addiction
• Banning or limiting consumption through regulation may reduce demand, but risks creating secondary (illegal) markets

Question 5

Examples of demerit goods

Answer 5

• High caffeine energy drinks
• High fat, high-sugar & high-salt foods
• Violent films and games
• Hands-free mobile phones in vehicles
• Alcohol fraud and binge drinking
• Tobacco products

Question 6

Are E-Cigarettes a merit or a demerit good

Answer 6

• 16% of the population use e-cigarettes. However only 0.14% of the population use e-cigarettes having never smoked before. The majority of users of e-cigarettes are current smokers who have given up smoking

Private COSTS of e-cigarettes
- Cost of starter e-cig packs
- Cost of liquid-nicotine cartridges

External COSTS of e-cigarettes
- Vapor from e-cigs is dangerous
- Gateway for young people to smoke

Private BENEFITS of e-cigarette consumption
- Utility from a nicotine hit
- Less social isolation

External BENEFITS of e-cigarette consumption
- E-cigs help smokers quit
- Reduced health costs to society