👉Demerit good definition
A demerit good is one that has the potential to harm the consumer, although the consumer may be unaware of or unconcerned about these negative impacts. Detrimental externalities — when consumption has a negative impact on a third party – are also common with demerit goods.
When it comes to defining demerit goods, we may suppose that individuals are irrational and make poor decisions, frequently consuming goods that are detrimental, degrading, or damaging in the long run. This could be due to a lack of information or bad judgement. To put it another way, people may overestimate private benefits while underestimating private costs.
👉Examples of demerit goods
When it comes to a good like alcohol, you could argue that it only becomes a demerit good when drunk in excess. One bottle per day, for example, is unlikely to create significant personal harm or negative externality. When drunk in excess, however, the personal and external costs might be substantial.
👉The difference between negative externalities and demerit goods
A good with negative externalities (such as driving a car) isn't really a demerit good. Driving a car pollutes the environment (negative costs to other people). However, we rarely think that driving a car is directly harmful to your health (compared to smoking). As a result, it would be classified as a negative externality rather than a demerit good.