Question 1

Are all goods provided by the government public goods?

Accepted Answer

No, this is a common misconception. The government provides many goods, such as education and healthcare, which are actually merit goods because they are rivalrous and excludable. A public good is defined strictly by its characteristics of non-rivalry and non-excludability (e.g., national defence), not by who provides it.

Question 2

Is the main problem with merit goods their positive externalities?

Accepted Answer

While merit goods often have significant positive externalities, the core reason for their classification and under-consumption is information failure. Individuals underestimate the private benefits to themselves (e.g., the future higher income from education). The positive externalities are an additional, related reason for government intervention, but information failure is the defining characteristic from a merit good perspective.

Question 3

If a good is 'bad for you', is it automatically a demerit good in economics?

Accepted Answer

Not necessarily. A good is classified as a demerit good if it is over-consumed due to information failure – people do not fully understand or account for the harm it causes them. If a consumer is fully aware of the risks of a high-sugar diet but chooses to consume it anyway, this is an issue of consumer choice. A demerit good specifically involves a lack of information or underestimation of personal harm, leading to a misallocation of resources from society's point of view.

Classification of goods and services

What you need to know

Classification of goods and services