Demerit good
Encyclopedia
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. It is over-consumed if left to market forces. Examples of demerit goods include tobacco
, alcoholic beverage
s, recreational drugs, gambling
, junk food
and prostitution
. Because of the nature of these goods, government
s often levy taxes on these goods (specifically, sin tax
es), in some cases regulating or banning consumption or advertisement of these goods.
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. Pollution (due, for example, to automobile use) is the canonical example of a negative externality. Another example is cigarettes. It not only affects you, but the people around you (second hand smoking). By contrast, a demerit good is viewed as undesirable because its consumption has negative effects upon the consumer.
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 (see 'Welfare Economics, Boadway and Bruce, Basil Blackwell 1984)
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, a demerit good is a good
Good (economics and accounting)
In economics, a good is something that is intended to satisfy some wants or needs of a consumer and thus has economic utility. It is normally used in the plural form—goods—to denote tangible commodities such as products and materials....
or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves. It is over-consumed if left to market forces. Examples of demerit goods include tobacco
Tobacco
Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines...
, alcoholic beverage
Alcoholic beverage
An alcoholic beverage is a drink containing ethanol, commonly known as alcohol. Alcoholic beverages are divided into three general classes: beers, wines, and spirits. They are legally consumed in most countries, and over 100 countries have laws regulating their production, sale, and consumption...
s, recreational drugs, gambling
Gambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
, junk food
Junk food
Junk food is an informal term applied to some foods that are perceived to have little or no nutritional value ; to products with nutritional value, but which also have ingredients considered unhealthy when regularly eaten; or to those considered unhealthy to consume at all...
and prostitution
Prostitution
Prostitution is the act or practice of providing sexual services to another person in return for payment. The person who receives payment for sexual services is called a prostitute and the person who receives such services is known by a multitude of terms, including a "john". Prostitution is one of...
. Because of the nature of these goods, government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
s often levy taxes on these goods (specifically, sin tax
Sin tax
A sin tax is a kind of sumptuary tax: a tax specifically levied on certain generally socially proscribed goods and services. These goods are usually alcohol and tobacco, but also include candies, soft drinks, fat foods and coffee, while services range from prostitution to...
es), in some cases regulating or banning consumption or advertisement of these goods.
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. Pollution (due, for example, to automobile use) is the canonical example of a negative externality. Another example is cigarettes. It not only affects you, but the people around you (second hand smoking). By contrast, a demerit good is viewed as undesirable because its consumption has negative effects upon the consumer.
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 (see 'Welfare Economics, Boadway and Bruce, Basil Blackwell 1984)