De-merit goods deliver a lower benefit to the consumer than he or she realises at the time of consumption and, given the combination of information failure and negative externalities from consumption, market failures are highly likely to exist and persist in the absence of government intervention. The AQA exam board likes students to draw a diagram where the marginal social benefit of consumption lies below the marginal private benefit. In this edition of the revision guide you will see a diagram where marginal social cost lies above marginal private cost. AQA examiners’ reports confirm that this approach (taught by many) is acceptable for questions on de-merit goods. So sleep easy!

1. Market Failure – De-Merit Goods

2. Market Failure
De-Merit Goods

3. De-Merit Goods
• De-merit goods are thought to be ‘bad’ for you
• Consumption can lead to negative externalities
• The social cost of consumption is higher than the private cost
• Consumers may be unaware of the negative externalities that these
goods create – they have imperfect information about long-term
damage to their own health.
• Government may decide to intervene in the market for de-merit
goods and impose taxes on producers or consumers.
• 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) markets
Social cost = private cost + external cost.
The market may fail to price the externalities

4. Examples of De-Merit Goods
High Caffeine
Energy Drinks
High-fat, high-
sugar & high-salt
foods
Violent films and
games
Hands-free mobile
phones in vehicles
Alcohol fraud and
binge drinking
Tobacco products
Key point: Arguments about what is a de-merit good involves making value judgements

5. Obesity and Externalities
• Obesity is a huge global economic and social problem
• More than 2.1 billion people – nearly 30% of the global population –
are estimated to be overweight or obese today
• The private costs of obesity are higher for lower income households
• According to research from McKinsey, the global economic impact from
obesity is roughly $2.0 trillion, or 2.8% of global GDP
• The cost of obesity on national health systems is estimated to be 2%
and 7% of all healthcare spending in developed economies
• This figure is likely to be much higher when the external costs arising
from Type 2 diabetes is included
• No country has managed to reduce measured rates of obesity between
the years 2000-2013
To help your evaluation: Think about the stakeholders involved in the food and drink
industry who might be affected by a change in government policy such as a high fat tax.

6. Obesity – Evaluating the Effectiveness of Interventions
Tax on high-fat and
high-sugar content
foods
End to supermarket
price promotions of
certain foods e.g.
two for one offers
Government might
provide free
compulsory school
meals and take
steps to improve
meal quality
Government
provides personal
subsidies (e.g., food
stamps for low-
income individuals
for sole use with
health foods)
Price
incentives
to change
demand
Grocery retailers
asked to allocate a
greater share of
space to healthier
products and
categories
School / office
canteens organised
differently to make
healthier foods
more prominent
Schools voluntarily
ban vending
machines and
snack shops
Prescription of
weight-loss drugs /
treatments,
perhaps
conditional on
active lifestyle
changes
Behaviour
nudges to
influence
choices

7. E-Cigarettes: Are they a Merit or a De-Merit Good?
Private Benefits of E-Cigarette
Consumption
External Benefits of E-Cigarette
Consumption
Utility of a nicotine hit E-cigarettes help smokers quit
Less social isolation Reduced health costs to society
Private Costs of E-Cigarette
Consumption
External Costs of E-Cigarette
Consumption
Cost of starter e-cig packs Vapor from e-cigs is dangerous
Cost of liquid-nicotine cartridges Gateway for young people to smoke
16% of the population use e-cigarettes. However, only 0.14% of the population use e-
cigarettes having never smoked before. The majority of users of e-cigarettes are current
smokers or people who have given up smoking. (Source of Data: ONS, October 2014).

8. Welfare Case for a Complete Ban on a Product
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 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.
Costs,
Benefits
£s
Output / quantity
MPC
P1
Q1
MPB =
MSB
P2
Q2
MSC
External Cost
What are the
main problems
in imposing a
ban?

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@tutor2u_econ

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