Merit and Demerit Goods

MERIT GOOD= a good that would be under-consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption
1. they ought to be subsidised or provided free according to the government
2. Examples~ health services, education, public libraries, inoculations for children and students
3. can be provided by the private sector and the public sector
  1. e.g. we have an independent education system and people can buy private healthcare insurance
DEMERIT GOOD= a good that would be over-consumed in a free market, as it brings less overall benefit to consumers than they realise
1. goods considered 'bad for you'
2. Examples~ alcohol, cigarettes, drugs, social effects of gambling addiction
3. consumers may be unaware of dangers and potential long-term damage in their own health
FAILURE OF INFORMATION (OR INFORMATION FAILURE)= where economic agents do not properly perceive the benefits or disadvantages of a transaction
1. Causes of under-consumption of merit goods and over-consumption of demerit goods
PARTIAL MARKET FAILURE= where the free market provides a product but with a misallocation of resources
Problems caused by merit and demerit goods
1. 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
  1. there will be insufficient demand for merit goods
  2. There will be too much demand for demerit goods

Resource summary

	Created by beth2384 over 10 years ago