Merit/Demerit Goods

• Merit goods


  Goods that are deemed to be more beneficial to consumers than they realize
• Merit goods are a normative consideration decided by politicians
• Imperfect information


  • At the heart of the market failure for merit goods
  • Consumers don't fully understand the benefits of merit goods
• Types of information failure


  • Information not present
  • Information not clear
  • Consumers choose to ignore information
• Asymmetric information


  Information exists but is not shared equally between two parties
• Merit goods often generate positive externalities in consumption
• Merit goods


  • Healthcare
  • Education
  • Exercise
  • Healthy eating
• Imperfect information with education

  Individuals may not fully understand the future benefits of education for higher incomes and better living standards
• Consuming education generates positive externalities
• Private benefits of education

  Lower than the full social benefits
• Marginal social benefit of education

  Higher than marginal private benefit
• Education is under-consumed and under-produced in a free market
• This leads to a welfare loss to society
• Demerit goods


  Goods deemed more harmful to consumers than they realize
• Demerit goods are also a normative consideration decided by politicians
• Imperfect information


  • At the heart of the market failure for demerit goods
  • Consumers may not know the full extent of the harm of demerit goods
• Examples of demerit goods


  • Cigarettes
  • Alcohol
  • Gambling
• Negative externalities in the consumption of demerit goods

  Pulls down the social benefit
• Demerit goods are over-consumed and over-produced in a free market