The market may fail to provide the correct amount of merit goods and demerit goods.

The free market may not be able to allocate resources efficiently due to information failure.

Merit goods

A merit good is defined as a good that is better for a person than the person who may consume the good realises.

Due to information failure, merit goods tend to be

underproduced
under-consumed

For a merit good such as healthcare, the long-term private benefit of consumption exceeds the short-term private benefit of consumption. But when deciding how much to consume, individuals take account of short-term costs and benefits, ignoring or undervaluing the long-term private costs and benefits.

Demerit goods

Demerit goods are those products that are worse for the individual consumer than the individual realises.

Due to information failure, demerit goods tend to be

overproduced
overconsumed

For example, when a person makes a decision to smoke, he is not fully in possession of all of the information concerning the harmful effects of smoking.