1. Merit and Demerit Goods

2. 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.

3. 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.

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

5. 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.

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

7. 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

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

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

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

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

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

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

14. 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

15. 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.

16. 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.