Demerit Goods

@PhilsEconomics
 Demerit Goods
• Those that are overprovided by the market
system because they have more harmful
effects than consumers realise
• Due to information failure
• They can lead to negative externalities, but
don’t have to
Contents of tobacco smoke
 Smoking Statistics
Around 10 million adults in Great Britain smoke cigarettes:
21% of men and 19% of women. 
Two-thirds of smokers start before the age of 18
 Demerit Goods
• Drugs
• These involve
large externalities
Such as?
 What is the best way to control the over-
consumption of cigarettes/alcohol/drugs?

• Divide into six groups

• Take one demerit good
• You have a choice of fixing the problems:
• Legislation
• Taxation
• Information
• How are you going to do it?
• Remember to use economic theory
• How is the government tackling smoking?
 Activity
• Taxes on cigarettes raise
£10 billion per year,
equivalent to raising
income tax by 3p for
EVERYBODY
• Why are cigarettes seen
as a Demerit good?
• Discuss in a paragraph
whether rising taxes on
cigarettes reduces
smoking.
Correcting The Problem of Demerit Goods

• Markets will over provide demerit goods

• This means Allocative Inefficiency
• Consumers do not spend their money in a way
which will maximise their utility, although they
think they do
How do Governments Try to Prevent the Use
of Demerit Goods?
• Legislation
• Taxation
• Information

• Hopefully, by using these, Private Benefits will

start to equate with Social Benefits…..
• Leading to the Socially Optimum Output
• Does it work though……?
 Evaluation of Exam Question on Demerit
Goods…
• With so many factors, how do we accurately
measure the difference between private and social
costs/benefits?
• What will the money be used for?
• Government intervention could lead to
Government Failure…
• With merit and demerit goods, value judgements
are involved
• Always think of an alternative
• The conclusion is probably that there is no single
answer, but a combination is probably best