1.6.4—Demerit goods

A demerit good is consumed above the socially desirable level when consumers underestimate its harmful effects, often because information is imperfect or addictive behaviour distorts choice.

The market quantity reflects perceived private benefit and cost; education, regulation, taxation or age restrictions may reduce the gap, with trade-offs for liberty and enforcement.

A consumer may underestimate the long-run health cost of cigarettes, so an information campaign and excise tax can reduce consumption, though neither guarantees the socially optimal quantity.

A demerit good is not defined by being illegal or disliked; the key is systematic over-consumption relative to welfare.