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👉‍Definition consumption externality

When you consume a good, it has a positive or negative externality on a third party.

👉‍Positive consumption externality

When the consumption of a good benefits others. Here are several examples:

Going to college. Your education benefits society as a whole 
Taking antiviral medication to prevent the spread of infectious disease.

👉‍Definition of merit goods

There are two characteristics of a merit goods

1. People are unaware of the true personal gain. People, for example, underestimate the value of education or vaccinations.
2. Merit goods will also have a positive externality.

As a result, there will be under consumption of merit goods in a free market.

👉‍Merit Goods Examples

🏨Health Care - Many people underestimate the value of vaccinations. If people get vaccinated, there will be a personal advantage in terms of disease prevention. There will also be external benefits to the rest of society because it will aid lower disease prevalence in the overall population.

🏬Museums - the educational value of museums is often overlooked.

🍇Eating fruits and vegetables - Although a raw fruit diet has health benefits, we may favour unhealthy foods.

👨‍💼Education - People may underestimate the value of education and choose to drop out or get poor marks.

👉‍Positive consumption externalities

Positive consumption externalities are the spillover effects of consumption of a good or service on others. When a person consumes a merit good, the resulting positive externality benefits other people.

When people travel by train rather than by car, other people benefit by there being less congestion and exhaust and fewer accidents on the roads. Thus the marginal social benefit of rail travel is greater than the marginal private benefit.

👉‍Providing information

Information is also provided by governments to persuade consumers to buy more goods that produce positive externalities. In most developed economies, people are urged to eat more fruit and vegetables to reduce the possible risk of health problems such as diabetes and obesity.

👉‍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.

👉‍Negative consumption externalities

Negative consumption externalities are created by consumers as a consequence of their use of products that result in harm to others who are not involved in the consumption.

When a person consumes a demerit good, such as tobacco, negative externalities are generated which are unpleasant or harmful to other people.
People unwillingly breathe in the fumes the smoker discharges, with eventual harmful effects on their health.

Because of the negative consumption externalities (the smoke breathed in by passive smokers who do not enjoy the fumes they inhale), the marginal social benefit (MSB) curve of the community is below the marginal private benefit (MPB) curve of the smokers themselves. The vertical distance between the two shows the negative externality.

👉‍Solutions to the problem of negative externalities


Legislation is also widely used in situations of negative consumption externalities. In the case of individuals, it is illegal to drive when drunk. Drunk driving imposes costs on others in the form of accidents and death.


The banning of smoking in public places is an example.


The provision of information is also appropriate in this case of market failure. For example, raising awareness about the dangers of smoking.

Indirect taxes

Market failure can be corrected by imposing an indirect tax on those who have caused the negative consumption externality. The supply curve shifts to the left; if the tax is the same as the external cost, then the quantity traded will fall to Q0. Allocative efficiency will now be achieved.

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Demerit goods and Merit goods - Welfare loss

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