Merit and demerit goods

Overview

Merit goods and examples, under-consumption and the consequences of under-provided healthcare and education, information failure and income, demerit goods and examples, the social consequences of alcohol over-consumption, addiction, sellers' incentives, demerit goods against goods harmful only to the buyer, merit goods as a value judgement, and effects on firms.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is a merit good?

   Model answer

   A merit good is one that is better for the consumer and for society than the consumer realises, so it is under-consumed in a free market.

2. 2

   Give three examples of merit goods.

   Model answer

   Education, healthcare and vaccination.

3. 3

   Why are merit goods under-consumed in a free market?

   Model answer

   Consumers undervalue the long-term private benefit and ignore the benefit to others, so they buy less than the socially optimal amount.

4. 4

   What are the consequences of under-provision of healthcare?

   Model answer

   There is more untreated illness, a less productive workforce, higher treatment costs later, and greater inequality between those who can and cannot pay.

5. 5

   How does under-consumption of education harm the economy in the long run?

   Model answer

   A less skilled workforce has lower productivity, which limits growth, tax revenue and the ability of firms to compete internationally.

6. 6

   Explain why information failure lies behind the under-consumption of merit goods.

   Model answer

   People cannot easily judge a benefit that will arrive decades later, so they discount it heavily and spend on immediate wants instead.

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