Merit Good Flashcards
What are merit goods?
- Merit goods are goods whose consumption is regarded as being beneficial to society.
- They provide benefits to both individuals and society as a whole ( due to positive externalities that result from their consumption ).
- People are usually unaware of the full benefits that merit goods provide.
How are merit goods consumed?
Underconsumed.
What are the two main reasons that merit goods are underconsumed?
- In a free market positive externalities that merit goods provide are ignored and production and consumption will be below the socially optimal level. ( producers and consumers won’t consider the wider benefits to society of a merit good ).
- Due to imperfect information, consumers don’t always realise the full benefits that merit goods provide.
What are demerit goods?
- Goods whose consumption is regarded as being harmful to the people that consume them, people are usually unaware about the harm that demerit goods can cause.
- Demerit goods have a harmful effect on society due to the negative externalities that result from their consumption.
How are demerit goods consumed?
Demerit goods tend to be overconsumed.
What are the two main reasons that demerit goods are overconsumed?
- In a free market, the negative externalities that demerit goods cause are ignored, and production and consumption will be above the socially optimal level.
- Due to imperfect information, consumers don’t always realise the harm that demerit goods cause.
What is a value judgement?
Based on people’s opinions and not economic theory or fact.
What is a difficulty with good classification?
It is difficult to say which goods should be classified as merit or demerit good as it is based on a value judgement.
How may the government increase consumption of a merit good?
The government may introduce a subsidy.
How may the government decrease consumption of a demerit good?
The government may introduce a tax, this will decrease consumption to the socially optimal level.
How does short term decision making affect the consumption of goods?
When individuals take the short term approach to decision making, it can lead underconsumption of merit goods and the overconsumption of demerit goods.
What occurs with people when it comes to the consumption of goods?
- People often only consider the shot term benefits or costs.
- Individuals can fail to see the need to make provision for the future and for potential changes in their circumstances.
What is the difference between the long term benefits of merit goods and demerit goods?
• The long term private benefits of merit goods are greater than their short term private benefits and the long term private costs of demerit goods are greater than their short term private costs.
Why do governments intervene in the supply of merit/demerit goods?
• The failure of the free market to supply the socially optimal levels of merit and demerit goods is the main reason why governments intervene to affect their supply.
How may governments correct market failure?
• Governments can directly provide certain goods or services or they can use taxes and subsidies to decrease or increase consumption of certain goods or services to the socially optimal level.
