This document discusses market failures caused by imperfect information. It defines merit goods as goods that are underprovided in free markets because individuals do not fully understand the benefits of consumption. Examples include healthcare and education. It also defines demerit goods as goods that are overconsumed in free markets because individuals do not realize the full costs of consumption. Examples include alcohol, cigarettes, and junk food. The document suggests that improving information on healthy living and the risks of demerit goods can help correct these market failures by closing the information gap.

1. Market Failures
Merit and demerit goods

2. Definition
When the free market
mechanism leads to a
misallocation of resources in
the economy, either
completely failing to provide a
good or service or providing
the wrong quantity.

3. Market failure
1. Negative externalities
2. Positive externalities
3. Merit & demerit goods
4. Public goods
5. Monopoly
6. Immobility of the factors of production
7. Unequal distribution of income and
wealth

4. Information failure
Imperfect
information
meaning merit
goods are under-
produced while
demerit goods
are over-
produced or over
consumed.

5. Merit Goods
Definition
A good that would be
under-consumed in a
free market, as
individuals do not fully
understand the benefits
that derived from the
consumption of that
goods
Examples
 The NHS
 State Education
 Public leisure centres
 Vaccinations
 Public Libraries
 Screening for cancer
 Eye tests
 Dental care

6. • Improved information on
healthy living to counter
the risk of growing obesity
and associated health
risks.
• The result being an
increase in the take up of
activities that improve
health and promote the
positive externalities that
go with its consumption.
QDS1
S (MSC)
QDS2 Quantity
Costs and benefits
P2
P1 E1
E2
D1 (MPB)
D2 (MSB)
Closing the information gap

7. Demerit Goods
Definition
Goods that are typically
considered to be ‘bad’ for
one. Such goods would be
over-consumed in a free
market, as it brings less
overall benefit to
consumers than they
realise. In addition to this,
consumption may well lead
to external costs that are
not taken account of.
Examples
 Alcohol
 Cigarettes
 Gambling
 Drugs
 Chocolate ?
 Fast foods ?
 Fizzy drinks ?
 High heeled shoes ?

8. • Improved information
on the disbenefits of
consumption and
greater awareness of
the negative
consequences to the
individual and
potential spills over
effects to third
parties.
• The result being a
reduction in the
consumption of
demerit goods to a
more socially
optimum level.
Q2
D2 (MSB)
S (MSC)
D1 (MPB)
Q1 Quantity
Costs and benefits
P1
P2 E2
E1
Closing the information gap