Q&A: Demerit Goods and Negative Production Externalities

Question: I was wondering what the difference between a demerit good and a good that has negative externalities in production was?

De-merit goods are usually but completely associated with consumption - after all consumption and production are inter-related, for example someone has to manufacture the ghetto blaster than creates noise pollution and there is waste in the production process for lots of de-merit goods.

With de-merit goods we tend to focus on the external costs of consumption either in terms of higher external costs or a reduction in social benefits because of negative spillover effects. Dont forget that what we classify as a de-merit good inevitably involves making normal value judgements + there is the information failure issue.

I have been trying to think of an example of a demerit good with negative externalities in production - how about the C02 emissions from computer servers that generate millions of spam emails?

I am sure blog readers can supply a stronger example!

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