Information Failure: Merit and Demerit Goods Lesson Objectives: 1. Define and give examples of merit and demerit goods 2. Define and explain what is meant by ‘Information Failure’ through use of examples. 3. Analyse why information failure leads to ‘problems’ with merit and demerit goods

Merit Goods Definition A merit good is one which would be under consumed in the free market, as individuals do not fully perceive the benefits obtained from consumption. Task: With specific reference to the key phrases in this definition, give two examples of merit goods and explain why each one is classed as a merit good. Hint: Think about products which have benefits for the private individual and positive externalities Extension: Can you use a diagram to show that this is a merit good?

Demerit Goods Definition A demerit good is one which would be over consumed in the free market, as it bring less overall benefits to consumers than they realise. Individuals do not fully perceive the true cost of consumption/production. Task: With specific reference to the key phrases in this definition, give two examples of demerit goods and explain why each one is classed as a demerit good. Hint: Think about products which have costs for the private individual and negative externalities Extension: Can you use a diagram to show that this is a demerit good?

But why do people under consume merit goods and over consume demerit goods?

Information Failure KEY TERM: Where economic agents do not properly perceive the benefits or disadvantages of a transaction

Asymmetric Information KEY TERM: Where either the buyer or the seller has more information than the other party. In an efficient market, both buyers and sellers have good information about the product. Discussion point: Can you think of a market where the seller has more information about the product than the buyer?

Task: Explain how each of the following images could represent information failure

Task: Explain how each of these images represents correcting information failure

Plenary – 9 Mark Question To check your understanding of today’s lesson, you should now attempt a 9 mark diagram question which will help you reflect on your understanding of prior knowledge and on of each of the lesson objectives i.e./ 1. Define and give examples of demerit goods 2. Define and explain what is meant by ‘Information Failure’ through use of examples. 3. Analyse why information failure leads to ‘problems’ with merit and demerit goods Question: Explain why information failure leads to the overconsumption of the demerit good, alcohol? Hints: in this question you will need to use the definition of demerit good and refer explicitly to the information failure that may be occurring.

Starter Questions 1. Explain why Binge Drinking of Alcohol could be described as Market Failure? (Hint: Use as many key terms as you can) 2. Use a diagram which shows the negative externalities associated with binge drinking and illustrates how it is over consumed in the free market.

Starter Answers 1.Explain why Binge Drinking of Alcohol could be described as Market Failure? Market failure occurs when the free market fails to provide an efficient allocation of resources, this often occurs because the price mechanism is not carrying out its function(s) effectively. In the case of binge drinking, this is an example of market failure because this consumption decision has negative externalities which spill over and adversely affect 3 rd parties, e.g./ anti-social behaviour. Therefore too many resources are allocated towards the production of this good and it is over consumed. The price of this product does not fully reflect its true cost to society. 2. Use a diagram which shows the negative externalities associated with binge drinking and illustrates how it is over consumed in the free market.