Transcript Merit and Demerit Goods

Merit and Demerit Goods
SLO

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.
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 provide for the
best allocation of resources?

We know from observing human behaviour that the
market fails in this respect.
Merit Goods

Merit goods are goods and services that
the government considers beneficial for
the public and will encourage production
and/or consumption of.
Merit Goods

Merit goods are provided by the market but
are likely to be over-priced and underproduced when compared to the socially
desirable equilibrium.

This is because the market (consumers and
producers) only consider the private benefit
and costs whereas there are many positive
externalities that result society consuming
more merit goods.
Merit Goods
Costs
MC
benefits($)
Pme
Pse
MSB
MB
Qme
Qse
Quantity
Government Intervention

The government will encourage more
consumption of something that is considered
good for us.
◦ Example Public education. Without the government
providing public education there would still be private
schools but there would not be enough schools to
satisfy societies demand for education. There would
certainly be some families that couldn’t afford
education
Government Intervention

Subsidies
◦ Use subsidies to encourage production of merit
goods and consumption.
◦ E.g. prescription drugs, tertiary education. Public
transport.
Government Intervention

Free Provision
◦ Providing some goods free of charge
◦ e.g primary and secondary education.
Visits to dentist under 18
Government Intervention

Compulsion
◦ Use of cycle helmets,
wearing safety belts, primary
and secondary education.
Government Intervention

Social Advertising
◦ Provides information to the public.
Public health campaign
Government Intervention

Social Marketing.
◦ Campaigns to change peoples habits or
attitudes. E.g. healthy lifestyles, energy
conservation.
Demerit Goods

Demerit goods are goods the government
discourages us from producing or
consuming because they are considered
bad for us.
Demerit Goods


Underpriced
and over
consumed
when
compared to
the social
equilibrium
Consumption
of these goods
can result in
negative
externalities –
therefore
reducing
welfare
Costs
MC
benefits($)
Pse
Pme
MB
Qse Qme
Quantity
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.
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.