Demerit good

In economics, a demerit good is "a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves".[1][2][3] It is over-consumed if left to market forces. Examples of demerit goods include tobacco, alcoholic beverages, recreational drugs, gambling, junk food and prostitution. Because of the nature of these goods, governments often levy taxes on these goods (specifically, sin taxes), in some cases regulating or banning consumption or advertisement of these goods.[4]

Concept

There is an important conceptual distinction between a demerit good and a negative externality. A negative externality occurs when the consumption of a good has measurable negative consequences on others who do not consume the good themselves.[5] Pollution (due, for example, to automobile use) is the canonical example of a negative externality. By contrast, a demerit good is viewed as undesirable because its consumption has negative effects upon the consumer. Cigarettes have both properties – they are a demerit good because they damage the smoker's own health, but they also produce the negative externality of damage to others via second-hand smoke.

Two fundamental views in welfare economics, welfarism and paternalism, differ in their conceptual treatment of 'demerit goods'. Simply, welfarism takes the individual's own perception of the utility of a good as the final judgement of the utility of the good for that person, and thereby disallows the concept of a 'demerit good' (while allowing the analysis of negative externalities). As an extreme example, if a heroin addict purchases heroin, they must have done so because heroin makes them better off, and this transaction is viewed as a net social positive (assuming that the addict does not commit any other crimes as the result of their addiction). Paternalism, on the other hand, judges that heroin "isn't good for you", and feels free to override the judgement of the addicts themselves[6].

See also

• Pigovian tax
• Soda tax
• Taxation and regulation of alcohol production
• Tobacco tax

References

1. "Demerit Good Law & Legal Definition". USLegal.com.
2. "Definition of demerit good". BusinessDictionary.
3. Pettinger, Tejvan (November 28, 2012). "Demerit good definition". Economics Help.
4. "Government responses - demerit goods". sanandres.esc.edu.ar.
5. "Demerit Goods". Economics Online.
6. Niel, Bruce; Boadway, Robin W (1984). Welfare economics. John Wiley and Sons. ISBN 9780631133278.

Further reading

• Boadway; Bruce (1984). Welfare Economics. Basil Blackwell. ISBN 9780631133278.