Merit and Demerit Goods

Merit goods, are goods that posses positive externalities and they are good for the consumers far much more than they can realize. On the other hand, demerit goods are those goods that will produce negative externalities when consumed and they are often far much worse than the consumer can imagine. Externalities imply the resultant effects of the actions of one individual or a company/ organization/entity on another individual or company/ organization/entity. For instance, the production of energy from a nuclear plant will have great benefits for the owners of the company producing the energy but on the other hand, negative externalities are created in way of waste on environment through release of radioactive substances; which are very dangerous on human beings, plants and animals. Governments consider merit goods to be very good and therefore encourage their availability.

They place subsidies on such goods in order to encourage their production and consumption. Examples of merit goods are health provision & education, which produce extremely positive externalities. On the other hand, demerit goods produce negative externalities which in turn decrease social welfare in terms of the economy. To control their production and consumption, governments introduce higher taxes, automatically leading to increased prices which in turn result in reduced demand and consequently production. Examples of demerit goods include alcohol and tobacco (Tutor2u, n.

d). Generally, governments have powerful mechanisms to control the production and consumption of merit and demerit goods. They achieve this mainly through taxes and subsidies, depending on the desirable economic impact. The government controls are meant to have a positive impact on their economies.