Merit and Demerit Goods

 

Definition: A merit good has 2 characteristics

• People do not realise the true benefit. For example, people underestimate the benefit of education or vaccinations.
• Usually these goods have positive externalities.

Therefore in a free market there will be under consumption of merit goods.

Examples of Merit Goods:

• Health Care
• Museums
• Education

 

Demerit Good:

Definition: A demerit goods has 2 characteristics:

1. People don’t realise, or ignore the costs, of doing something e.g. smoking, drugs.
2. Usually these goods have negative externalities.

Therefore in a free market there will be over consumption of these goods. the govt should intervene to reduce demand.

Examples of Demerit Goods include:

• Smoking
• Drinking
• Taking drugs

Essays and Revision Notes on Market Failure

• Market Failure
• Negative Externalities
• Positive Externalities
• Public Goods
• Merit and Demerit Goods
• Policies to Overcome Market Failure
• Tax on Negative Externality Diagram
• Subsidy on Positive Externality Diagram
• Market Failure at Tutor 2U
• Cost Benefit Analysis