1.3.4 Information Gaps
Merit goods - e.g healthcare
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Merit goods are goods which are under consumed in a free market. This is because people
do not fully understand their benefits.
The public and private sector both provide merit goods and consumption of these goods
generates positive externalities.
Society values theses goods and judges that everyone should have them. This is regardless if
an individual doesn’t want them.
The government believes individuals may not act in their own best interest. This is because
of imperfect information about the long-term benefits of the good.
Merit goods are linked to failure of information. The free market will lead to a provision of a
product but in the wrong quantity.
Demerit goods – e.g Cigarettes
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Demerit goods are considered as “Bad”. The consumption of demerit goods can lead to
negative externalities. Consumers may be unaware of theses due to long-term imperfect
health information.
Demerit goods are linked to a failure of information. Because of this the government tries to
reduce consumption of demerit goods.
Symmetric Information – e.g a product you may know a lot about
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This is when buyers and sellers both have perfect information and knowledge about the
product you are buying.
Asymmetric Information – e.g the purchase of washing machines
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This type of information is when one party knows more than the other.
Some products are only bough occasionally so consumers have limited information.
A problem with healthcare is you don’t know if you’re getting appropriate treatment.