ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the consumption of merit goods usually gives rise to positive externalities and not negative externalities.
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in a free market demerit goods will be under-consumed but merit goods will be over-consumed.
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merit goods have to be provided by the government but demerit goods do not.
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demerit goods are an example of market failure but merit goods are not.
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Detailed explanation-1: -What is a merit and demerit good? Merit goods are goods for which the social benefits of consumption outweigh private benefits, whereas a demerit good is a good for which the social costs of consumption outweigh private costs.
Detailed explanation-2: -A merit good can be defined as a good which would be under-consumed (and under-produced) by a free market economy, due to two main reasons: When consumed, a merit good creates positive externalities (an externality being a third party/spill-over effect of the consumption or production of the good/service).
Detailed explanation-3: -Non-merit goods and demerit goods are used interchangeably. But the items that are not merit goods can be considered as non-merit goods. Whereas those that are extremely opposed to merit goods can be considered as demerit goods.
Detailed explanation-4: -A positive externality exists when a benefit spills over to a third-party. Government can discourage negative externalities by taxing goods and services that generate spillover costs. Government can encourage positive externalities by subsidizing goods and services that generate spillover benefits.