Merit Goods And De-merit Goods

Question 1

Information failure definition

Answer 1

Occurs because individuals do not have all the relevant information about the good and it’s benefits. In the case of merit goods individuals may underestimate the private benefits of consuming the good and may be ignorant of the external benefits. Therefore, underconsumption.

Question 2

Left to the free market, merit goods are under-produced / under consumed because

Answer 2

They generate positive externalities that decision makers do not take into account when deciding how much to produce / consume.

Decision makers dinner know how much benefit they will obtain from consuming the good / service.

Question 3

Demerit goods

Answer 3

Generate negative externalities and like merit goods they associate with Information failures. Therefore, left to the free market, demerit goods are over produced / consumed.

Question 4

Left to the free market demerit goods are over produced / consumer because

Answer 4

They generate negative externalities

The are associated with information failures which mean that decision makers don’t realise how bad they are for them and may be ignorant of the external costs involved.

Question 5

Merit goods definition

Answer 5

Merit goods are goods that generate positive externalities. Overall therefore left to the free markets merit goods are underproduced/under consumed.