Merit & Demerit Goods

Question 1

Define a Merit Good.

Answer 1

• People underestimate the benefits - Usually has positive externalities

Question 2

In the free market are merit goods over / under consumed?

Answer 2

Under-Consumed

Question 3

Give two examples of merit goods.

Answer 3

• Museums – the educational benefit of museums. - Education – People may undervalue the benefits of studying, and decide to leave school early or not get good grades.

Question 4

Define a Demerit Good.

Answer 4

• A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs. - Usually, these goods also have negative externalities. If you smoke you harm yourself, but also the smoke negatively affects other people.

Question 5

In the free market are demerit goods over / under consumed?

Answer 5

Over-Consumed

Question 6

Name 5 examples of a demerit good?

Answer 6

Alcohol Cigarettes Drugs Junk food Gambling

Question 7

What kind of judgement is the classification of demerit goods called?

Answer 7

A normative judgement

Question 8

Why is alcohol considered a demerit good?

Answer 8

• Consuming alcohol can cause personal health problems, e.g. long-term liver problems or hangover the next morning. But, individuals may ignore these costs or think they don’t apply to them. Consuming alcohol can also cause costs to other people (external costs), such as increased levels of crime and cost of treating disease.

Question 9

Give an example and the distinction between demerit good and negative externality of the situation.

Answer 9

• Driving a car
• Driving a car causes pollution but it doesnt mean it is bad for you.
• Therefore it isnt classified as a demerit good only a negative externality.

Question 10

How does the government reduce demand for demerit goods?

Answer 10

Place a tax on the good, e.g. tobacco tax

Place regulations on the consumption, e.g. legal minimum age of 18.