Answer to Question #296349 in Microeconomics for Josh

Question

Whether merit or demerit goods are best provided in a market economy

Answer 1

A merit good is a commodity that is assessed to be necessary for an individual or society based on some sense of need rather than ability or willingness to pay. A divergence between the marginal private benefit and the marginal social benefit curves causes market failure in these types of goods. This is because when individuals consume merit products, they generate positive consumption externalities that benefit and value society, but not the private individual. As a result, because consumers are uninformed of the greater social benefit, the MPB curve always falls below the MSB curve, resulting in the good being under-consumed in the market, such as the long-term economic and economic growth benefits of persons seeking higher education.

A demerit good is a good that the market over-supplies and, as a result, people consume excessively. This type of good includes tobacco, alcohol, and fast food, to name a few. A divergence between the marginal private and marginal societal benefit curves causes the market failure in certain types of goods. This is because when people buy shabby items, they create negative consumption externalities that affect the rest of society. As a result, the MSB curve is always lower than the MPB curve, resulting in market overconsumption. Individuals who smoke cigarettes, for example, enjoy the personal benefits of smoking, such as the pleasure they get from doing so now. However, it also generates a number of external expenses that are passed on to society (third parties), which the smoker may be unaware of due to the lack of accurate information.

Because all items, whether merit or demerit goods, play a key role in the market, the cost and benefit to society is the sum of the benefits and costs for all parties involved.