MF- Demerit Goods

Question 1

Information failure?

Answer 1

Consumers may be unaware of the negative externalities that these goods create- they have information failure about long-term damage to their own health

Question 2

The government may..

Answer 2

Decide to intervene in the market for de merit goods and impose taxes on producers or consumers

Question 3

Taxes on demerit goods?

Answer 3

Many economists argue that taxation is ineffective and inequitable for curbing the consumption of drugs and gambling particularly for those affected by addiction

Question 4

Banning through regulation may..

Answer 4

Reduce demand, but risks creating secondary markets

Question 5

Key point:

Answer 5

Arguments about what is a de merit good involves making value judgements

Question 6

Examples of de merit goods

Answer 6

High caffeine energy drinks, violent films and games, tobacco products

Question 7

Market failure with demerit goods

Answer 7

• the free market may fail to take into account the negative externalities of consumption because the social cost exceeds the private cost
• consumers may experience imperfect information about the long term costs to themselves of consuming products deemed to be de merit goods

Question 8

The case for complete ban on de merit goods

Answer 8

The social marginal cost of consumption is always higher than the social marginal benefit

Question 9

E-Cigarettes UK

Answer 9

16% population use e-cigarettes. However only 0.14% users of e-cigarettes having never smoked before.