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Study notes

De-Merit Goods

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

De-merit goods are thought to be 'bad' for you - this statement implies that a value judgement is being made

Short revision video on de-merit goods

Examples include the external costs arising from consumption of alcohol, fast-food, cigarettes and drugs together with the social effects of addiction to gambling.

  • The consumption of de-merit goods can lead to negative externalities.
  • Consumers may be unaware of the negative externalities that these goods create – they have imperfect information about long-term damage to their own health.
  • The government may decide to intervene in the market for de-merit goods and impose taxes on producers or consumers.
  • But many economists argue that taxation is an ineffective and inequitable way of curbing the consumption of drugs and gambling particularly for those affected by addiction.
  • Banning or limiting consumption through regulation may reduce demand, but risks creating secondary (illegal) or underground

Market failure with demerit goods

The free market may fail to take into account the negative externalities of consumption because the social cost exceeds the private cost. Consumers too may experience imperfect information about the long term costs to themselves of consuming products deemed to be de-merit goods

Prescription drugs to treat alcohol top £3m (BBC news, May 2014)

Obesity – a time bomb

There is a huge debate at the moment about the causes of obesity and the social costs that arise from increasing levels of obesity. Obesity is an international problem. Across the Atlantic in the USA, two out of every three Americans are overweight; one out of every three is obese. One in three is expected to have diabetes by 2050. Minorities have been even more profoundly affected.

What of harder drugs?

Should hard drugs be prohibited at all costs by the government in a bid to control demand by restricting supply? Regulation has been the route chosen by most governments in developed countries – but economists are divided on the issue. Some believe that legalisation and taxation of harder class drugs is a better policy to pursue, arguing that regulation is ineffective and costly. Another approach would be giving better information to drug users about the health implications of their consumption decisions.

Cigarettes will be sold under plain packaging in the UK from next April as a result of a vote by MPs to ban branded packaging. Imperial Tobacco has said it will sue the UK government to defend its "valuable intellectual property"

Deloitte Monday Briefing (March 2015)

Recent articles on this topic

Fewer students are binge drinking (BBC news, Feb 2015)

Exam Technique Taxing De-Merit Goods - revision video

Chains of reasoning taxing de-merit goods - revision video

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