Merit and Demerit Goods

Merit and Demerit Goods

1. MERIT GOOD= a good that would be under-consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption

   • they ought to be subsidised or provided free according to the government
   • Examples~ health services, education, public libraries, inoculations for children and students
   • can be provided by the private sector and the public sector
     • e.g. we have an independent education system and people can buy private healthcare insurance

2. DEMERIT GOOD= a good that would be over-consumed in a free market, as it brings less overall benefit to consumers than they realise

   • goods considered 'bad for you'
   • Examples~ alcohol, cigarettes, drugs, social effects of gambling addiction
   • consumers may be unaware of dangers and potential long-term damage in their own health

3. FAILURE OF INFORMATION (OR INFORMATION FAILURE)= where economic agents do not properly perceive the benefits or disadvantages of a transaction

   • Causes of under-consumption of merit goods and over-consumption of demerit goods

4. PARTIAL MARKET FAILURE= where the free market provides a product but with a misallocation of resources

5. Problems caused by merit and demerit goods

   • Both merit and demerit goods are considered market failures since their existence will cause the wrong amount of the goods and services concerned to be produced
     • there will be insufficient demand for merit goods
     • There will be too much demand for demerit goods

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