8.5

• Merit goods definition

  A good for which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good
• merit goods are considered to have positive externalities
• What is under provided in a free-market?

  Merit goods
• why can merit goods lead to partial market failure?

  they’re under provided and under consumed
• for merit goods, individuals often underestimate the benefits of these goods, people may not consume enough of these goods on their own
• What is an argument for government intervention for merit goods?

  It would encourage their consumption
• examples of merit goods:

  • healthcare - people underestimate benefit of having vaccination. reduced prevalence of disease in rest of society
  • museums - educational benefit can be under appreciated
  • eating fruits and vegetables - health benefits but many prefer unhealthy foot
  • education - people undervalue benefits, decide to leave early or not get good grades
• what are the characteristics of merit goods?

  • positive externalities - when person consumes long-term good there’s a positive externality as it benefits others
  • merit goods and information failures - individuals take account short-term costs and benefits, undervaluing long-term costs and benefits
• information failure definition

  occurs when people make wrong decisions because they do not possess or they ignore relevant information. very often they are myopic (short-sighted) about the future
• social benefit definition

  the total benefit of an activity, including the external benefit as well as the private benefit
• subsidy definition

  a payment made by government or other authority, usually to producers, for each unit of the subsidised good that they produce. consumers can also be subsidised: e.g bus passes given to children to enable them to travel on buses free or at a reduce price
• demerit goods definition

  goods for which the social costs of consumption exceed the private costs. value judgments are involved in deciding that a good is a demerit good
• demerit goods tend to be over-consumed to a greater extent than is usually considered socially desirable from the perspective of society as a whole
• Social cost definition

  The total cost of an activity, including the external cost as well as the private cost
• demerit goods often have negative externalities, which means that their consumption can lead to harmful consequences for individuals or society
• what are the characteristics of demerit goods?

  • over-consumption - consumed in larger quantities than would be optimal for society’s well-being. can have negative consequences
  • negative externalities - can include health costs, environmental damage or increased social costs
  • imperfect information - consumers don’t have complete or accurate information about negative consequences associated with demerit goods this lack of information can lead to increased consumption
• demerit good examples


  • tobacco - increased healthcare costs and higher rates of illness like lung cancer
  • alcohol - drunk driving accidents, healthcare problems, social issues
  • junk food - high-sugar, high fat and processed food can cause obesity and related diseases. impose costs on healthcare systems and society
  • gambling - financial and social problems for individuals and their families creating negative externalities
• what do free market economist believe? (merit and demerit goods)

  • individuals are the best judges on what is good or bad for themselves
  • individuals should be free to consume as much or as little as thet like
  • state should not play any role in determining consumption of goods
• What do interventionist economists believe ? (Merit and demerit)

  • over consumption has social costs
  • Overconsumption of demerit and underconsumption of merit goods leads to people being harmed
  • Regulation, subsidies and taxation should be used to change behaviours

  1. taxes - governments may improve taxes on demerit goods to increase their prices, making them less affordable and reducing consumption
  2. Regulations - restrict adversity, sales to minors or availability of demerit goods
  3. Public awareness campaign
• What do behavioural economists believe? (Merit and demerit)

  • consumers needed to be given as much information as possible in what to consume
  • Information needs to be provided to ensure individuals make the right choice
  • Consumers need to have a greater variety of choice so that the most desirable products are consumed
  • Information of appropriate policies to ‘nudge’ individuals to the right direction
• Not all products that result in positive or negative externalities in consumption are either merit or demerit goods