Merit and Demerit goods

• What is a merit good?

  • A good that is under consumed/produced when left to the free market due to a lack of profit incentive.
  • Has positive externalities
• Why are merit goods under consumed?

  Consumers are unaware of the benefits they behold due to imperfect information = under provision
• What are the 2 forms of imperfect information?

  Information failure - there is either no info, info is unclear, or the info is being ignored

  Asymmetric information - information is not equal
• What are demerit goods?

  • A good that is over consumed/produced when left to the free market as firms are profit maximisers
  • Has negative externalities
• Why are demerit goods overconsumed?

  Consumers and producers are unaware of the external consequences due to imperfect information = overprovision