Merit and demerit goods

• What are negative externalities caused by?

  Demerit goods
• Why are demerit goods associated with information failure?

  Because consumers are not aware of the long run implications of consuming the good
• What are two examples of demerit goods?


  Cigarettes and alcohol
• What is a negative externality associated with consuming cigarettes?

  Second-hand smoke or passive smoking
• What causes positive externalities?

  Merit goods
• Why are merit goods associated with information failure?

  Because consumers do not realize the long run benefits of consuming the good
• What are two examples of merit goods?

  Education and healthcare
• What is a positive externality associated with education?

  A higher skilled workforce
• Why is it hard to determine the extent of market failure due to externalities?

  It involves a value judgement, making it subjective
• Why is it difficult to decide the cost of pollution to society?

  Different individuals will value it differently based on their experiences
• How does imperfect information affect the provision of demerit and merit goods?

  It may lead to the over-provision of demerit goods and under-provision of merit goods
• Why would education be under-provided in a free market?


  Because the long term benefits of education are not accounted for in society
• Are all products that result in positive or negative externalities classified as merit or demerit goods?

  No, not all products are classified as either merit or demerit goods