Merit and Demerit Goods

• Merit goods are goods that are better for consumers than they realize, leading to underconsumption due to consumers underestimating their full benefits.
• Demerit goods are goods that are worse for consumers than they realize, leading to overconsumption due to consumers being unaware of the full harmful effects.
• Market failure occurs when the market fails to produce an efficient allocation of resources, resulting in underconsumption of merit goods and overconsumption of demerit goods.

This module  explains the concept of merit and demerit goods and how they contribute to market failure. Merit goods are those that provide more benefits to consumers than they realize, such as vaccinations. Despite the potential benefits, many people underestimate them and fail to take action. On the other hand, demerit goods, like smoking, have harmful effects that consumers may not fully consider. Market failure occurs when the market fails to allocate resources efficiently. In the case of merit goods, the market under-consumes them because consumers do not fully appreciate their benefits. Conversely, demerit goods are over-consumed because consumers do not fully understand the harm they cause. This leads to an inefficient allocation of resources.