Merit and Demerit Goods

Merit Good: a good that would be under consumed in a free market, as individuals do not
fully perceive the benefits obtained from consumption

Demerit Good: a good that would be over consumed in a free market, as it brings less
overall benefit to consumers than they realise

Classification depends on a value judgement

Create positive/negative externalities in

consumption

The under consumption of merit goods results

from imperfect information and is market failure

The over consumption of demerit goods results

from imperfect information and is market failure

You must be able to demonstrate the

misallocation of resources caused by both merit
and demerit goods on MSB/MSC graphs