👉‍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

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.

Ban

The banning of smoking in public places is an example.

Information

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.