Demerit good

Demerit good
See also
Government intervention Imported inflation Negative tourism impacts Market failure Non-tariff barriers Inflationary gap Price controls Normal good Ratchet effect

A demerit good is a good that has a negative externality associated with its consumption, meaning that the good has a negative effect on a third party that is not involved in the production or consumption of the good. Examples of demerit goods include cigarettes, alcohol, and junk food.

The negative effect of a demerit good can vary based on how much of it is consumed. For example, smoking one cigarette will not have the same negative health effects as smoking multiple packs a day. As such, the government can intervene to limit the negative effects of demerit goods by creating taxes, regulations, or bans on the production and/or consumption of the good.

In addition, governments can incentivize the production and/or consumption of demerit goods by providing subsidies for them. For instance, the government may provide subsidies for farmers that produce tobacco, or for companies that produce alcohol.

Overall, demerit goods are goods that have a negative effect on third parties and can be regulated or subsidized by the government in order to limit or encourage their production and consumption.

Example of Demerit good

Demerit goods are goods that have a negative effect on third parties that are not involved in the production or consumption of the good. Examples of demerit goods include:

• Cigarettes: Smoking cigarettes can have negative effects on the health of the smoker, as well as those around them due to secondhand smoke.
• Alcohol: Excessive consumption of alcohol can lead to health problems, as well as increase the likelihood of car accidents or other dangerous behavior.
• Junk food: Eating too much junk food can lead to an unhealthy lifestyle, and can contribute to the development of heart disease and diabetes.

Overall, demerit goods are goods that are associated with negative externalities, and the government can intervene to limit or encourage their production and consumption.

Formula of Demerit good

The formula for a demerit good is given by:

$P_{d}=P_{m}+t-s$

where P_d is the price of the demerit good, P_m is the price of the good in the market, t is the tax placed on the good, and s is the subsidy given for the good.

Types of Demerit good

Demerit goods can be classified into three main categories:

• Unhealthy goods: These are goods that have a direct negative effect on the health of consumers, such as cigarettes, alcohol, and junk food.
• Polluting goods: These are goods that produce pollution as a result of their production or consumption, such as cars, electricity, and coal.
• Hazardous goods: These are goods that pose a risk of harm to the environment or to other people, such as weapons, explosives, and fireworks.

Disadvantages of Demerit good

Demerit goods also have some disadvantages that should be noted. Firstly, the externalities associated with these goods may be hard to quantify, which can make it difficult for the government to assess the true impact of the good and thus make appropriate policy decisions.

In addition, policies such as taxes and subsidies may be regressive, meaning that the policy imposes a greater burden on lower-income individuals than those with higher incomes.

Finally, policies related to demerit goods may be hard to enforce and monitor, as citizens may find ways to circumvent the regulations and consume the good anyway.

Overall, demerit goods have many associated externalities, but these externalities can be hard to quantify, and the policies associated with these goods may be regressive and hard to enforce.

Other approaches related to Demerit good

There are other approaches that can be used to address the negative externalities associated with demerit goods. These include:

• Internalizing the externality: This approach involves the parties involved in the production and/or consumption of the demerit good paying for the external costs associated with it. This could be done through taxes or fines.
• Education: This approach involves educating people about the potential negative effects of consuming a demerit good, in order to encourage people to limit their consumption of the good.
• Voluntary action: This approach involves encouraging people to voluntarily reduce or stop consuming the demerit good. This approach is often used in conjunction with education.

Overall, there are a variety of approaches that can be used to address the negative externalities associated with demerit goods, such as internalizing the externality, educating people, and encouraging voluntary action.

Suggested literature

• Schroyen, F. (2005). An alternative way to model merit good arguments. Journal of Public Economics, 89(5-6), 957-966.
• Thiele, S., & Roosen, J. (2018). Obesity, fat taxes and their effects on consumers. Regulating and Managing Food Safety in the EU: A Legal-Economic Perspective, 169-193.
• Lovell, M. C. (1960). Forced Saving in a Keynesian Economy: An Analysis of Demand-Pull Inflation.