Merit and demerit goods

• What are merit goods?

  • Merit goods are products that are beneficial for society but the free market does not provide enough of them
• What are demerit goods?

  Demerit goods are products which have harmful impacts on consumers or society
• What are value judgements?

  • Value judgements play a role in determining whether goods are classified as merit or demerit goods
  • Some goods are clearly defined as being a merit or demerit good, such as education (merit good) and illegal drugs (demerit good)
  • The classification of some goods can be unclear as it is based on a value judgement 
• Why are merit goods under consumed?

  • Consumers under-consume merit goods as they do not fully recognise the private or external benefits
  • Merit goods are often under-provided in a free-market and are a cause of partial market failure
  • Common examples include vaccinations, education and electric cars
  • Governments often have to subsidise these goods in order to lower the price and/or increase the quantity demanded

  
• Why are demerit goods over consumed?

  • consumers over-consume demerit goods to a greater extent than is considered desirable by society
  • Consumers are unlikely to consider all of the consequences when making consumption decisions
  • The social costs of consumption outweigh the private costs 
  • Demerit goods are often over-provided in a free-market and are a cause of partial market failure
  • These goods are usually addictive and harmful for consumers
  • Governments have to regulate these goods in such a way that they raise the prices or limit the quantity demanded

  
• What makes it difficult for consumers to make a decision about a good service?

  A lack of information
• What does imperfect information cause?

  • Due to imperfect information, consumers may have incomplete or inaccurate information about the external consequences associated with merit or demerit goodsMerit goods are often under-provided, due to a lack of demand. Consumers are unaware of the positive effects of consuming such goods Demerit goods are often over-provided, due to high demand as consumers are ill-informed of consequences of consuming such goods
  • Efforts to educate the public by the government, such as public awareness campaigns can help consumers make more informed choices