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

Merit Goods

Museum

NHS

Y

X

Now think about the last time you

consumed each of these……

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

Demerit Goods

Z

Alcohol

Y

X

Now think about the last time you

consumed each of these!!

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 Merit or Demerit? Demerit Goods

• Petrol• Healthcare• Prostitution• Sterilisation• Abortion• Car Seat Belts• Crash

Helmets• Alcohol• Tobacco

• Contraception• Pornography• Heroin• Museums• Parks• Lighthouses• BioFuel Cars• McDonalds• Sweets• Marijuana

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…

Debate PointsTh

e G

overn

men

t • 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…

Th

e G

en

era

l Pu

blic

• 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.