Merit & Demerit Goods
AS Economics Unit 1
Starter Discussion
• Should museums be free?
• Should all schooling be free?
• Should water be free?
• Should universities be free?
• Should marijuana be legalised?
• Should alcohol and cigarettes be taxed so heavily?
Aims and Objectives
Aim:
 To understand merit and demerit goods
Objectives:
 Define merit and demerit goods.
 Provide examples of merit and demerit goods
 Analyse the over, and under consumption of these goods,
hence market failures.
 Evaluate government policies concerned with merit and
demerit goods.
Merit Goods
• Goods that would be under-consumed in a free
market, as individuals do not fully understand the
benefits obtained from consumption.
• Ought to be subsidised or free at point of use.
• Social benefits exceed the private benefits.
• Consumption produces positive externalities.
Brainstorm of Merit Goods
Museum
X
Merit
Goods
Y
Now think about the
last time you
consumed each of
these……
NHS
Why do people under consume merit
goods?
• People may not act in their best interest due to imperfect
information. (not knowing that it is beneficial to consume
these goods in the long run).
• Even though most may be free!!
• Education Case Study
Under-Consumption/Production of Merit
Goods
• MSC = marginal social
cost
• MPC = marginal private
cost
• MPB = marginal private
benefit
• MSB = marginal social
benefit
• MEB = Marginal external
benefits
Why do people under consume merit
goods?
•
Education
•
Too little is consumed (Q1)
MPC=MPB
•
Many people especially those from a
poorer background become
uneducated or relatively
uneducated.
•
This is not socially optimal (Q2)
MSC=MSB
•
Leads to under
production/consumption.
Demerit Goods
• Goods which are ‘bad for you’.
• A good such as tobacco for which the social costs to society
of consumption exceed the private costs incurred by the
consumer.
• Consumption causes negative externalities to society.
• Private costs include money spent on goods and health
damage.
• Social costs also include cost of negative externalities.
Brainstorm of Demerit Goods
Z
X
Demerit
Goods
Y
Now think about the
last time you
consumed each of
these!!
Alcohol
Over-Consumption of Demerit Goods
• MSC = marginal social
cost
• MPC = marginal private
cost
• MPB = marginal private
benefit
• MSB = marginal social
benefit
• MEC = Marginal external
costs
Over-Consumption of Demerit Goods
• Tobacco
• Too much is consumed at
market prices (Q1)
MPB=MPC.
• Greater than the socially
optimal level (Q2)
MSB=MSC.
• Free market leads to over
production and over
consumption of demerit
goods.
• Too many scarce resources
are used to produce demerit
goods.
Why do people Over Consume Demerit
Goods?
• Over consumption of demerit
goods has negative externalities.
• People have imperfect
information, as they are unaware
of long term health effects.
• Or they are addicted…or both.
• The government seeks to reduce
the consumption of demerit
goods.
Complete Following Table
Merit Goods
Petrol
Healthcare
Prostitution
Sterilisation
Abortion
Car Seat Belts
Crash
Helmets
• Alcohol
• Tobacco
•
•
•
•
•
•
•
Merit or Demerit?
•
•
•
•
•
•
•
•
•
•
Contraception
Pornography
Heroin
Museums
Parks
Lighthouses
BioFuel Cars
McDonalds
Sweets
Marijuana
Demerit Goods
Value Judgements
• Classification of merit and demerit goods
depends on value judgements.
• These are statements or opinions expressed
that cannot be verified and depend very
much on the views that individual may
have.
Market Failure
• Merit goods cause market failure because
too little is consumed in a free market.
• Demerit goods cause market failure
because too much is consumed in a free
market.
Debate
‘The UK government sees alcohol, tobacco and drugs as demerit
goods. It imposes taxes, has banned advertising, and has laws
in an attempt to reduce consumption. The aim is to improve the
health of the UK, and to reduce the burden on the NHS and
taxpayer. However, is it actually imposing these to discourage
consumption, or to benefit from the high taxes imposed on
these goods, with the front of appearing to want to improve
health? After all Zimbabwe spends more money as a %GDP on
health than the UK! Why have Big Macs not been taxed? Why
does KFC or Nestle not receive taxation on their goods as
obesity levels rise!
Similarly has enough been done to encourage the use of merit
goods, such as museums? The number of people leaving school
at 16 is high, and youth unemployment is at an all time high.
Has there been two enormous market failures in the UK for
some time, which the government has failed to see?’
You decide…
• The government are
doing well to increase
the number of merit
goods being
consumed, whilst
decreasing the
number of demerit
goods being
consumed.
• However times are
tough and the deficit
must be reduced…
The General Public
The Government
Debate Points
• Obesity levels are
high, drug abuse
levels are high.
• Addiction is rife and
the government is
cutting support
centres.
• The government isn’t
spending taxes on
healthcare.
• More educational
areas should be free,
like castles.
Plenary
• Define a merit good
• Define a demerit good
• What is the link between these and market
failures?
• Give 5 examples of each.
• Explain ways in which the government tries
to increase consumption of merit goods and
decrease consumption of demerit goods.