Merit Goods and Demerit Goods

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    Merit Goods and Demerit Goods

    • Market can fail in the provision of merit goods and demerit goods
    • Merit goods tend to have positive externalities associated with their consumption, while demerit goods can have negative externalities
    • See examples table

     

    • The problem when categorizing merit and demerit goods is that value judgements have to be made – it’s a subjective process
    • Such judgements have to be made by someone – usually the government
    • The assumption is that such decision-making institutions know better than individuals what is good or bad for them
    • With this approach, it is genuinely believe that individuals lack accurate information about the positive or negative externalities
    • There is obviously information failure here.

     

    • Some economists think there’s no such thing as a merit/demerit good.
    • They think that it is the individual and not the government that knows what’s best for them
    • This contradicts the view that the government knows better due to greater information at their disposal

     

    • Because consumers don’t have the information available to make a decision on whether it’s a good thing to consume a product (with regards to merit goods), merit goods will be under-consumed and under-produced in a free market situation
    • Resources aren’t efficiently allocated, so the market’s failing.

     

    • Once again, value judgements are involved for demerit goods
    • See Example Table

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