What are merit goods?

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 WHAT ARE MERIT GOODS?

• Merit goods are goods & services the government feels people will under-consume,
and which might be subsidised or made free at the point of use
• With merit goods individuals may not act in their own interest because of imperfect
information – they do not fully understand the private benefits of their consumption.
• Information failure is an important aspect of the merit goods issue.
• Merit goods can be rival, excludable and rejectable.
• Consumption of merit goods generates positive externalities - where the social benefit
exceeds the private benefit.
• A merit good is a product that society values and judges that people should have
regardless of their ability to pay.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 EXAMPLES OF MERIT GOODS

• Education: Individuals who receive education not only benefit themselves by

acquiring knowledge and skills but also contribute positively to society through
increased productivity, lower crime rates, and a more informed citizenry.
• Vaccinations: When individuals get vaccinated, they protect themselves from
disease, but they also contribute to herd immunity, reducing the risk of disease
transmission within the community.
• Clean energy: The use of clean and renewable energy sources, such as solar or
wind power, can be considered a merit good because it reduces carbon emissions
and air pollution, benefiting society in terms of reduced environmental damage
• Public libraries: While individuals benefit from using libraries, they also contribute
to a more literate and informed society.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 MERIT GOODS AND MARKET FAILURE
Costs, One cause of under-
Benefits
£s consumption and therefore
market failure is that people will
P3 only consider their own private
MPC
costs and benefits – leading to a
private optimum output of Q1.

P1 MSB

Merit goods give

rise to external
MPB
benefits
Q1 Quantity

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 MERIT GOODS AND MARKET FAILURE
Costs, One cause of under-
Benefits
£s consumption and therefore
market failure is that people will
P3 only consider their own private
MPC
costs and benefits – leading to a
private optimum output of Q1.
P2
If the consumption of merit
P1 MSB goods leads to external benefits,
the optimum output from
society’s point of view is higher
at Q2. The under-consumption
Merit goods give of a merit good is a cause of
rise to external
benefits
MPB market failure.
Q1 Q2 Quantity

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 MERIT GOODS AND MARKET FAILURE
Costs, Welfare loss arising from One cause of under-
Benefits under-consumption
£s consumption and therefore
market failure is that people will
P3 only consider their own private
MPC
costs and benefits – leading to a
private optimum output of Q1.
P2
If the consumption of merit
P1 MSB goods leads to external benefits,
the optimum output from
society’s point of view is higher
at Q2. The under-consumption
Merit goods give of a merit good is a cause of
rise to external
benefits
MPB market failure.
Q1 Q2 Quantity

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 HEALTHCARE SPENDING IN THE UK
300
Total healthcare expenditure (In £

250

200
billion )

150

100

50
0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 2*
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 202

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 What are demerit
goods?

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 WHAT ARE DEMERIT GOODS?

• In economics, de-merit goods are a category of goods that are believed

to have negative externalities or adverse effects on society that are not
fully recognized by individuals consuming the goods.
• These negative externalities mean that the consumption of de-merit
goods has spillover effects on society that go beyond the harm
experienced by the individuals consuming the goods themselves.
• As a result, in the absence of government intervention or corrective
measures, individuals may over-consume or excessively consume these
goods, leading to suboptimal outcomes for society.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 WHAT ARE DEMERIT GOODS?

High Caffeine High-fat, high- Violent films and Hands-free cell

Energy Drinks sugar & high-salt games phones in vehicles
foods

Alcohol fraud and Tobacco products

binge drinking

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 DEMERIT GOODS AND VALUE JUDGEMENTS

• The concept of de-merit goods involves making judgements about what is

harmful or detrimental to individuals and society.
• These judgements are typically based on societal norms and ethical
considerations which inherently involve value judgments.
• For example, labeling a product as a de-merit good, such as tobacco,
requires a judgment that smoking is harmful to health.
• The design of policies to address de-merit goods, such as taxes, regulations,
or public health campaigns, involves value judgments about the most
effective and equitable means of achieving the desired outcomes while
respecting individual autonomy.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 DEMERIT GOODS AND IMPERFECT INFORMATION

• Information Gaps: For example, a person may not be aware of the long-term
health benefits of education or vaccinations.
• Misleading Advertising: Producers of demerit goods may engage in misleading
advertising that downplay the negative externalities and emphasize the
immediate gratification associated with these goods. This can lead consumers
to underestimate the harm they cause and over-consume them.
• Addictive Properties: Some demerit goods, like tobacco or alcohol, have
addictive properties. Consumers may not fully grasp the long-term health
consequences or addiction risks, especially when they start using these goods.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 PREVALENCE OF SMOKING IN THE UNITED KINGDOM
40

35
Population share (%) Forecast from 2023

30

25

20

15

10

0
0 00 001 002 003 004 005 006 007 008 009 010 011 012 013 014 015 016 017 018 019 020 021 022 023 024 025 026 027 028
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 PREVALENCE OF SMOKING IN THE UNITED KINGDOM
Cigarettes share of household spend in the UK 2018, by income group
1.4%
1.2%
1.2%
1%
1.0%
0.8% 0.7%
0.6% 0.6%
Share of spending

0.6% 0.5%
0.4% 0.4% 0.4%
0.4% 0.3% 0.3%
0.2%
0.0%
t p p p p p p p p t s
c en ro
u
ro
u
ro
u
ro
u
ro
u
ro
u
ro
u
ro
u c en o ld
r g g g g g g g g r h
pe ic le ic le ic le ic le ic le ic le ic le ic le pe u se
n n o
t te de de de de de de de de t te ll h
es n d ird r th ift h
ixth n th h th nt
h
he
s A
ow co Th ou F S ve Eig Ni g
L S e F Se Hi

Disposable income decile group*

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 E-CIGARETTES USE AMONG ADULTS IN THE UK

E-cigarette use among adult smokers in Great Britain 2013-2022

Current users Ex-users Never tried
100%
90%
30% 28%
Percentage of respondents

80% 39% 37% 37% 35% 34% 32%

48%
70%
62%
60%
50%
51% 47%
40% 41% 42% 42% 43% 43% 47%
33%
30%
20% 25%
10% 18% 18% 19% 18% 20% 20% 17% 17% 22%
10%
0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 ARE E-CIGARETTES (VAPES) A DEMERIT GOOD?
Private Costs of E-Cigarette Consumption External Costs of E-Cigarette Consumption

Cost of starter e-cig packs Vapor from e-cigs is dangerous

Cost of liquid-nicotine cartridges Gateway for young people to smoke

Private Benefits of E-Cigarette Consumption External Benefits of E-Cigarette Consumption

Utility from a nicotine hit E-cigarettes help smokers to quit

Less social isolation Reduced health costs to society

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 WELFARE ANALYSIS DIAGRAM FOR DEMERIT GOODS
Benefit, Social optimum is where MSB = MSC
Cost

MPC = MSC
With negative consumption
externalities, if consumption of a
C product reduces benefits enjoyed by
third parties, the benefits to society
are less than benefits obtained by
A
MPB
individuals consuming the product.

Negative externalities lead to

B overconsumption and hence
MSB overproduction

Q1 Q2 Quantity consumed

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 WELFARE ANALYSIS DIAGRAM FOR DEMERIT GOODS
Benefit, Deadweight loss of social Social optimum is where MSB = MSC
Cost welfare = ABC

MPC = MSC
With negative consumption
externalities, if consumption of a
C product reduces benefits enjoyed by
third parties, the benefits to society
are less than benefits obtained by
A
MPB
individuals consuming the product.

Negative externalities lead to

B overconsumption and hence
MSB overproduction

Q1 Q2 Quantity consumed

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 Smoking cigarettes generates negative consumption externalities.
1 This means that

A The private benefit from smoking includes the consumption externalities.

B The social benefit from smoking is less than the private benefit.

C The social benefit from smoking is negative.

D The social optimum level of smoking is zero.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

2 Which one of the following applies to merit goods?

A They are likely to be provided by the market.

B Their marginal private benefit is greater than their marginal social benefit.

C They can only be supplied by the government.

D They have the characteristics of non-excludability and non-rivalry.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

3 Which one of the following applies to merit goods?

A Demerit goods represent a type of market failure because

B Their production results in negative production externalities.

C They are over-consumed in a free market.

D They are under-consumed when left to free market forces.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

 The free-market equilibrium price for a merit good is £50 per unit. At present, the
4 government does not intervene in the market for this good. The government is most likely to
correct the market failure associated with this merit good if it

A Imposes a maximum price of above £50 per unit.

B Sets a minimum price of £50 per unit.

C Taxes the free market price.

D Subsidises the free market price.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS

5 A key distinction between merit goods and demerit goods is that

The consumption of merit goods usually gives rise to positive externalities and not
A negative externalities.

In a free-market demerit goods will be under-consumed, but merit goods will be over-
B consumed.

C Merit goods must be provided by the government, but demerit goods do not.

D Demerit goods are an example of market failure, but merit goods are not.

MERIT & DE-MERIT GOODS TUTOR2U.NET/ECONOMICS