merit goods
With merit goods - the state is concerned with maximising the consumption of certain goods which it deems to be desirable; goods and services where the social benefits exceed the private benefits, e.g. Education and Healthcare are assumed to generate positive externalities.
Higher government spending on these merit goods should yield a positive social rate of return which leads to an improvement in total economic welfare.
There is a case for some form of government intervention to encourage increased consumption of merit goods. This might take the form of an explicit government subsidy to reduce the private marginal costs of consumption and cause an expansion of demand.
De-merit goods are those goods or services that create negative externalities when the product is consumed. This reduces the social marginal benefit of consumption and also leads to potential market failure through over-consumption.
The government normally chooses to tax those products that generate negative consumption externalities. Or it may choose some form of regulation as an alternative strategy.
De-Merit Goods
Merit goods are 'good' for you. Demerit goods are thought to be 'bad' for you. Examples are alcohol, cigarettes and various drugs. The consumption of de-merit goods can lead to negative externalities which causes a reduction in social economic welfare.
The government normally tries to reduce consumption of de-merit goods. Consumers may themselves be unaware of some of the negative externalities that these goods create - they have imperfect information.
Merit goods and market failure
Merit goods provide positive externalities but if left wholly to the private sector, it is likely that merit goods will be under-consumed. Partly this is because individuals do not understand or appreciate the social benefits that can result from consumption of education and health services to name just two examples.
De-merit goods and market failure
De-merit goods create negative externalities which
leads to a reduction in social economic welfare. The government may decide
to intervene in the market for these goods and impose taxes on producers and
/ or consumers. Higher taxes cause prices to rise and should lead to a fall
in demand.
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