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