2SLO By the end of this lesson you will be able to Explain the concept of consumer sovereignty.Define and give examples of merit and demerit goods.
3Consumer SovereigntyThe idea of consumer sovereignty is that consumers know best what is good for themAnd that by their willingness to pay (demand), they can ensure that such goods and services are provided in the right quantities.Do you think that consumer sovereignty provide for the best allocation of resources?We know from observing human behaviour that the market fails in this respect.
4Merit GoodsMerit goods are goods and services that the government considers beneficial for the public and will encourage production and/or consumption of.
5Merit GoodsMerit goods are provided by the market but are likely to be over-priced and under- produced when compared to the socially desirable equilibrium.This is because the market (consumers and producers) only consider the private benefit and costs whereas there are many positive externalities that result society consuming more merit goods.
7Government Intervention The government will encourage more consumption of something that is considered good for us.Example Public education. Without the government providing public education there would still be private schools but there would not be enough schools to satisfy societies demand for education. There would certainly be some families that couldn’t afford education
8Government Intervention SubsidiesUse subsidies to encourage production of merit goods and consumption.E.g. prescription drugs, tertiary education. Public transport.
9Government Intervention Free ProvisionProviding some goods free of chargee.g primary and secondary education. Visits to dentist under 18
10Government Intervention CompulsionUse of cycle helmets, wearing safety belts, primary and secondary education.
11Government Intervention Social AdvertisingProvides information to the public. Public health campaign
12Government Intervention Social Marketing.Campaigns to change peoples habits or attitudes. E.g. healthy lifestyles, energy conservation.
13Demerit GoodsDemerit goods are goods the government discourages us from producing or consuming because they are considered bad for us.
14Demerit GoodsUnderpriced and over consumed when compared to the social equilibriumConsumption of these goods can result in negative externalities – therefore reducing welfareCostsbenefits($)MCPsePmeMBQseQmeQuantity
15Demerit Goods - Government The government believes that consumers overvalue the good because of imperfect information and that these goods are far worse for individuals than realised.The government believes that demerit goods should not beconsumed at all our insmall quantities.
16Government Intervention TaxesTax increase costs, reduces supply, reduces QD. E.g. Tax on alcohol, cigarettesRegulationsLaws to discourage consumption and production. Firearms, noise levels.BansGovernment overrides consumer sovereignty. E.g Class A drugs, smoking in public buildings.Public Education Program meProviding publicity and education programs to discourage demerit goods. E.g Drink driving, inappropriate diets.