Merit Goods and Demerit Goods

Merit Goods and Demerit Goods

  • Market can fail in the provision of merit goods and demerit goods
  • Merit goods tend to have positive externalities associated with their consumption, while demerit goods can have negative externalities
  • See examples table


  • The problem when categorizing merit and demerit goods is that value judgements have to be made – it’s a subjective process
  • Such judgements have to be made by someone – usually the government
  • The assumption is that such decision-making institutions know better than individuals what is good or bad for them
  • With this approach, it is genuinely believe that individuals lack accurate information about the positive or negative externalities
  • There is obviously information failure here.


  • Some economists think there’s no such thing as a merit/demerit good.
  • They think that it is the individual and not the government that knows what’s best for them
  • This contradicts the view that the government knows better due to greater information at their disposal


  • Because consumers don’t have the information available to make a decision on whether it’s a good thing to consume a product (with regards to merit goods), merit goods will be under-consumed and under-produced in a free market situation
  • Resources aren’t efficiently allocated, so the market’s failing.


  • Once again, value judgements are involved for demerit goods
  • See Example Table