Unit 1 Micro: De-Merit Goods

This is a revision blog on the concept of de-merit goods

De-merit goods are thought to be ‘bad’ for you (note here the inevitability of making value judgement when discussing this topic!). Examples include the costs arising from consumption of alcohol, 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 markets in the product

Market failures 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 multiple information failures about the long term costs to themselves of consuming products deemed to be de-merit goods

Obesity – a time bomb

There is a huge debate at the moment about the root causes of obesity and the social costs that arise from increasing levels of obesity. Obesity is also 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. The UN has signled out obesity as one of the world’s greatest health challenges.

Global diabetes numbers at all-time high

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 to divert resources away from regulation towards giving better information to drug users about the longer term health implications of their consumption decisions.

Alcohol and health fears: Alcohol: new risk of cancer even for moderate drinkers

The case for a complete ban on de-merit goods such as class A narcotics could be justified on the ground that the social marginal cost of consumption is always higher than the social marginal benefit. In the diagram above there is no output where the social benefit equals the social cost and welfare would be best protected by trying to enforce a total ban on the product