Demerit Goods
Demerit goods are goods with negative externalities where the social cost exceeds the private cost, and consumers underestimate their harms. Governments discourage consumption through taxes or regulation. Examples include cigarettes, alcohol, and drugs.
Real World
The UK government levies over £2 in duty on a pack of cigarettes, yet smoking still costs the NHS approximately £2.5 billion annually, showing that consumers continue to undervalue the health risks despite price signals.
Exam Focus
Draw a diagram showing MSC above MPC and label the welfare loss triangle — this is the most commonly tested demerit goods skill.
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