Merit and Demerit Goods Merit and Demerit Goods

SLO 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 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 GoodsMerit GoodsMerit goods are goods and

services that the government considers beneficial for the public and will encourage production and/or consumption of.

Merit GoodsMerit GoodsMerit goods are provided by the

market but are likely to be over-priced and under-produced 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 Merit Goods

Quantity

Costs

benefits($)

MB

MC

MSB

Qme Qse

Pme

Pse

Government InterventionGovernment InterventionThe 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 InterventionGovernment InterventionSubsidies

◦Use subsidies to encourage production of merit goods and consumption.

◦E.g. prescription drugs, tertiary education. Public transport.

Government InterventionGovernment InterventionFree Provision

◦Providing some goods free of charge

◦e.g primary and secondary education. Visits to dentist under 18

Government InterventionGovernment InterventionCompulsion

◦Use of cycle helmets, wearing safety belts, primary and secondary education.

Government InterventionGovernment InterventionSocial Advertising

◦Provides information to the public. Public health campaign

Government InterventionGovernment InterventionSocial Marketing.

◦Campaigns to change peoples habits or attitudes. E.g. healthy lifestyles, energy conservation.

Demerit Goods Demerit Goods Demerit goods are goods the

government discourages us from producing or consuming because they are considered bad for us.

Demerit GoodsDemerit Goods

Underpriced and over consumed when compared to the social equilibrium

Consumption of these goods can result in negative externalities – therefore reducing welfare

Quantity

Costs

benefits($)

MB

MC

Qme

Pme

Qse

Pse

Demerit Goods - Demerit Goods - GovernmentGovernment

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 InterventionGovernment InterventionTaxes

◦ 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.