Definition of Merit Good:
A merit good has two characteristic:
- People do not realise the true benefit. For example, people underestimate the benefit of education or vaccinations.
- Usually these goods have positive externalities.
Therefore in a free market there will be under consumption of merit goods.
Examples of Merit Goods:
- Health Care – people underestimate the benefits of getting a vaccination. If people do get a vaccination, then there will be external benefits to the rest of society because it will help reduce disease in the rest of society.
- Museums – the educational benefit of museums.
- Education – People may undervalue benefits of studying.
A demerit goods has two characteristics:
- A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs.
- Usually these goods also have negative externalities.
Therefore in a free market there will be over consumption of these goods.
Examples of Demerit Goods include:
- Taking drugs
More on demerit goods
Note: merit and demerit goods involve making a value judgement that something is good or bad for you.