In contrast to a merit good, consuming a demerit good creates negative spillover effects.
For example, if a driver consumes excessive alcohol and then crashes into an innocent driver causing damage to their vehicle, a negative consumption externality has arisen. Society has suffered because the actual benefit of drinking by some has reduced the benefits possible (from driving) to others. This reduces the Marginal Social Benefit (MSB) by the extent of the negative effect on others, so that the socially efficient consumption of alcohol is less than the free market level of consumption.
Similarly, cigarette smoking by some individuals in public places will reduce the benefits to others in the form of passive smoking. This may also lead to higher taxes for all taxpayers which the government pay need to pay for increased healhcare in the future.
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Market failure 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 imperfect information about the long term costs to themselves of consuming products deemed to be de-merit goods
Prescription drugs to treat alcohol top £3m (BBC news, May 2014)
Obesity – a time bomb
There is a huge debate at the moment about the causes of obesity and the social costs that arise from increasing levels of obesity. Obesity is 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.
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 giving better information to drug users about the health implications of their consumption decisions.
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 imperfect information about the long term costs to themselves of consuming products deemed to be de-merit goods
Prescription drugs to treat alcohol top £3m (BBC news, May 2014)
Obesity – a time bomb
There is a huge debate at the moment about the causes of obesity and the social costs that arise from increasing levels of obesity. Obesity is 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.
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 giving better information to drug users about the health implications of their consumption decisions.
Cigarettes will be sold under plain packaging in the UK from next April as a result of a vote by MPs to ban branded packaging. Imperial Tobacco has said it will sue the UK government to defend its "valuable intellectual property"
Deloitte Monday Briefing (March 2015)
