Merit and Demerit Goods

Definition of Merit Good:

A merit good has two characteristic:

  • 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 – people underestimate the benefits of getting a vaccination. If people do get a vaccination, then there will be external benefits to the rest of society because it will help reduce disease in the rest of society.
  • Museums – the educational benefit of museums.
  • Education – People may undervalue benefits of studying.

Demerit Good:

A demerit goods has two characteristics:

  1. A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs.
  2. Usually these goods also have negative externalities.

Therefore in a free market there will be over consumption of these goods.

Examples of Demerit Goods include:

  • Smoking
  • Drinking
  • Taking drugs

More on demerit goods

Note: merit and demerit goods involve making a value judgement that something is good or bad for you.