Merit and Demerit Goods

SLO 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.

Consumer Sovereignty The idea of consumer sovereignty is that consumers know best what is good for them And 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.

Merit Goods Merit goods are goods and services that the government considers beneficial for the public and will encourage production and/or consumption of.

Merit Goods Merit 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.

Merit Goods Costs benefits($) MC Pme Pse MSB MB Qme Qse Quantity

Government 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

Government Intervention Subsidies Use subsidies to encourage production of merit goods and consumption. E.g. prescription drugs, tertiary education. Public transport.

Government Intervention Free Provision Providing some goods free of charge e.g primary and secondary education. Visits to dentist under 18

Government Intervention Compulsion Use of cycle helmets, wearing safety belts, primary and secondary education.

Government Intervention Social Advertising Provides information to the public. Public health campaign

Government Intervention Social Marketing. Campaigns to change peoples habits or attitudes. E.g. healthy lifestyles, energy conservation.

Demerit Goods Demerit goods are goods the government discourages us from producing or consuming because they are considered bad for us.

Demerit Goods Underpriced and over consumed when compared to the social equilibrium Consumption of these goods can result in negative externalities – therefore reducing welfare Costs benefits($) MC Pse Pme MB Qse Qme Quantity

Demerit 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 be consumed at all our in small quantities.

Government Intervention Taxes Tax increase costs, reduces supply, reduces QD. E.g. Tax on alcohol, cigarettes Regulations Laws to discourage consumption and production. Firearms, noise levels. Bans Government overrides consumer sovereignty. E.g Class A drugs, smoking in public buildings. Public Education Program me Providing publicity and education programs to discourage demerit goods. E.g Drink driving, inappropriate diets.