This document discusses merit and demerit goods. Merit goods provide positive externalities to society and are underprovided in free markets. The government encourages their consumption through subsidies, free provision, compulsion, and information campaigns. Demerit goods cause negative externalities and are overconsumed in free markets. The government discourages them through taxes, regulations, bans, and education programs to correct for market failures around these goods.

1. Merit and Demerit Goods

2. Objectives
 By the end of this lesson you will be
able to
◦ Explain the concept of consumer
sovereignty.
◦ Define and give examples of merit and
demerit goods.
◦ Explain the policies used to increase the
use of merit goods and decrease the use
of demerit goods

3. Consumer Sovereignty
 The idea of consumer sovereignty is that
consumers know best what is good for them
 And that by their willingness to pay (demand),
they can ensure that such goods and services
are provided in the right quantities.
 Do you think that consumer sovereignty provides
the best allocation of resources?
 We know from observing human behaviour that
the market fails in this respect.

4. Merit Goods
 Merit goods are goods and services
that the government considers
beneficial for the public and will
encourage production and/or
consumption of.

6.  Merit goods and services create positive
externalities when consumed and these
3rd party spill over benefits can have a
significant effect on social welfare.
 Market failure occurs when merit goods
and services are under-consumed under
free market conditions.
 Policy intervention can help either
through offering financial incentives (e.g.
consumer or producer subsidies) or
 through behavioral nudges and
information campaigns designed to
change our choices.

7. Merit Goods
 Merit goods are provided by the
market but are likely to be:
 over-priced and under-produced
 This is because the market
(consumers and producers) only
consider the private benefit and
costs not the social benefits that
result from consuming more merit
goods.

8. Merit Goods

9. Government Intervention
 The government will encourage more
consumption of something that is
considered good for us.
 Example Public education.
 Without the government providing public
education there would still be private schools but
not enough schools to satisfy societies demand
for education.
 There would certainly be some families that
couldn’t afford education

10. Government Intervention
 Subsidies
◦ Use subsidies to encourage production
of merit goods and consumption.
◦ E.g. prescription drugs, tertiary
education. Public transport.

11. Government Intervention
 Free Provision
◦ Providing some goods free of charge
◦ e.g primary and secondary
education. Visits to dentist under 18

12. Government Intervention
 Compulsion
◦ Use of cycle helmets,
wearing safety belts,
primary and secondary
education.

13. Government Intervention
 Social Advertising
◦ Provides information to the public.
Public health campaign

14. Government Intervention
 Social Marketing.
◦ Campaigns to change peoples habits or
attitudes. E.g. healthy lifestyles, energy
conservation.

15. Demerit Goods
 Demerit goods are goods the
government discourages us from
producing or consuming because they
are considered bad for us.

16. Demerit Goods
 De-merit goods are thought to be ‘bad’ for
you
 Consumption can lead to negative
externalities
 The social cost of consumption is higher than
the private cost
 Consumers may be unaware of the negative
externalities that these goods create – they
have imperfect information about long-term
damage to their own health.
 Government may decide to intervene in the
market for de-merit goods and impose taxes
on producers or consumers.

18. Demerit Goods
 Underpriced
and over
consumed
when
compared to
the social
equilibrium
 Consumption
of these
goods can
result in
negative
externalities
– therefore
reducing
welfare

19. Demerit Goods - Government
 The government believes that
consumers overvalue the good
because of imperfect information and
that these goods are far worse for
individuals than realised.
 The government believes that demerit
goods should not be consumed at all
our in small quantities.

20. Government Intervention
 Taxes
◦ Tax increase costs, reduces supply, reduces QD. E.g. Tax
on alcohol, cigarettes
 Regulations
◦ Laws to discourage consumption and production.
Firearms, noise levels.
 Bans
◦ Government overrides consumer sovereignty. E.g Class
A drugs, smoking in public buildings.
 Public Education Program me
◦ Providing publicity and education programs to discourage
demerit goods. E.g Drink driving, inappropriate diets.