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.