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Merit and Demerit goods Grade 11 Economics

Merit and Demerit goods Grade 11 Economics. Objectives Define and give examples of merit and demerit goods. Analyse the over-, and under-consumption of

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Objectives

• Define and give examples of merit and demerit goods.

• Analyse the over-, and under-consumption of these goods, hence market failures.

• Evaluate government policies concerned with merit and demerit goods.

Key Words

Demand CurveSupply CurveMerit GoodsDemerit GoodsMarket EquilibriumSurplusShortage

Private BenefitSocial BenefitExternalities

Demerit Goods• Goods which are ‘bad for you’.• A good such as tobacco for which the social costs to society of

consumption exceed the private costs incurred by the consumer.

• Consumption causes negative externalities to society.• Costs include money spent on goods and health damage.

Brainstorm of Demerit Goods

Demerit Goods

Z

Alcohol

Y

X

Now think about the last time you consumed each of

these!!

Over Production of Demerit Goods

Cost

& B

enefi

ts

Quantity Supply

6

5

4

3

2

1

0Q1

Marginal Private Cost

Marginal Benefits

Q3Q2

Marginal Social Cost

Why do people Over Consume Demerit Goods?• People have imperfect

information, as they are unaware of long term health effects.

• Or they are addicted…or both.

• The government seeks to reduce the consumption of demerit goods.

Merit Goods• Goods that would be under-consumed in a free market, as

individuals do not fully understand the benefits obtained from consumption.

• Ought to be subsidised or free at point of use.• Social benefits exceed the private benefits.

Brainstorm of Merit Goods

Merit Goods

Museum

NHS

Y

X

Now think about the last time you consumed each of

these……

Production Shortage of Merit Goods

Cost

& B

enefi

ts

Quantity Supply

6

5

4

3

2

1

0Q1

Marginal Private Cost

Marginal Private Benefits

Marginal Social Benefits

Q3 Q2

Why do people under consume merit goods?

People may not act in their best interest due to imperfect information (not knowing that it is beneficial to consume these goods in the long run).

Complete Following Table

Merit Goods Merit or Demerit? Demerit Goods

• Petrol• Healthcare• Abortion• Car Seat Belts• Crash Helmets• Alcohol• Tobacco

• Heroin• Museums• Parks• Lighthouses• BioFuel Cars• McDonalds• Sweets• Marijuana

Market Failure

• Merit goods cause market failure because too little is consumed in a free market.

• Demerit goods cause market failure because too much is consumed in a free market.