Negative Externalities: Diagram

We’ve now seen that merit goods are goods which are underconsumed because of either positive externalities or information gaps.

So demerit goods are…

Demerit goods are goods which are overconsumed because of either negative externalities or information gaps.

So cigarettes are a demerit good – they’re overconsumed because of their negative externalities (like how passive smoking can lead to lung cancer) and overconsumed because of information gaps (consumers, especially younger consumers, aren’t informed of the full health costs of smoking…like death!)

Alcohol is another demerit good – they’re also overconsumed because of their negative externalities (like how binge drinking can lead to drink driving and vandalism) and overconsumed because of information gaps (young consumer aren’t informed of the full health costs of alcohol – like liver disease and horrific hangovers)

Other demerit goods include: 

Video games – they don’t have any negative externalities, they don’t harm other people, but video games are still overconsumed because of information gaps (few people are informed on the health risks of video games, like video game addiction which can lead to obesity and mental illness). 

Or bagpipes – also a demerit good…there aren’t any information gaps here…but there are negative externalities: when you play your bagpipes, you annoy everyone around you!