Demerit good : A good that would be over- consumed in a free-market, as it brings less overall benefit to consumers than they realise. * Demerit goods are those goods considered ‘bad’ for you. EX) Alcohol, cigarette. * Demerit goods can lead to negative externalities which consumers may be unaware of, since they have imperfect information about potential long-term damage to their own health. * Demerits goods are linked to a failure of information. Thus the government seeks to reduce consumption of demerit goods.

The problems caused by merit and demerit goods

Merit goods tend to be under produced and under consumed in a free market, since a lack of information about the benefits derived from consumption, will result in ‘too little’ of the product being demanded.
Because the benefits occur over time in many cases e.g. education. consumers may not be able to accurately appreciate the benefit which may arise, nor not be able to afford it. if we assume that consumers can correctly perceive the actual private benefit, demand would be given by D2. This would lead to an equilibrium price of p1 and quantity Q1. However, because the consumer effectively undervalues the product, the level of actual demand remains less, at D1 leading to a free market price of p2 and Q2. * Draw a graph*
In the case of a demerit good, the social optimum level of demand is given by D1 leading to an equilibrium price of P1 and quantity produced and consumed of Q1. Consumer overestimate the benefit arising from the product and so demand is at D2 instead. This leads to a free market price of P2 and quantity of Q2. The consumer is unable to properly value the relative costs and benefits arising from their consumption of their products.

Public good: A good that possesses the characteristics of non- excludability and non rivalry in consumption. *