Merit and demerit goods

  • under consumption of merit goods
  • over consumption of merit goods 
  • inequalities in the distributions of income and wealth
  • labour mobility as a cause of market failure
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Merit goods

  • Education or health care
  • good or service for which the social benefits of consumption enjoyed by the whole community exceed the private benefits received by the consumer 
  • Comsumption by an individual produces positive externalities that benefit the wider community
  • The misallocation of resources are caused by the under-consumption of merit goods
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Demerit Goods

  • The social cost to the whole community which result from the consumption of a demerit good, exceed the private costs incurred by the consumer
  • This is because consumption by an individual produces negative externalities that harm the wider community 
  • Tobacco, alcohol
  • The private costs can be measured by the money cost of consuming the good, together with any health damage suffered by the person comsuming the good
  • The social costs of consumption also include the cost of the negative externalities
  • Over consumption of demerit goods cause a misallocation of resources 
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Merit goods, demerit goods and the information pro

  • Individuals consuming merit and demerit goods may not act in their own best interest because they only consider the short-term utility maximisation rather than the long-term utility maximisation
  • The long term private benefits of consuming a merit good such as education exceed the short term private benefits
  • Similarly with a demerit good such as tobacco, the long term private costs exceed the short term private costs
  • The government should therefore encourage the consumption of merit goods and discourage the consumption of demerit goods
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Inequalities in the distribution of income and wea

  • Can be seen as a form of market failure
  • Argued that a completely unregulated market economy produces significant inequalities
  • Some economists believe that government intervention to redistribute income and wealth destroys incentives that are vital for a market economy to funtion efficiently
  • Leads to worse problems of government failure 
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Immobility of Labour

  • Form of market failure 
  • Occupational immobility 
  • Geographical immobility
  • This means that economic resources are no fully held back by labour shortages in areas benefiting from full employment
  • Free market theory - the problem can be cured through wage rates rising in areas of labour shortage 
  • However - the market mechanism fails to solve the problem, and labour shortages and surpluses persist
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