Demerit goods


Free access to the

FT-access-to-schools-logo(11)Sixth formers and their teachersnow get free access to the

To gain free access register your interest here.

Read more
Model agencies collude to fix rates

Regulators find leading model agencies guilty of price fixing.

Read more
Alternative finance

Report on the growth of alternative finance.

Read more

Demerit goods

In contrast to a merit good, consuming a demerit good creates negative spillover effects.

For example, if a driver consumes excessive alcohol and then crashes into an innocent driver causing damage to their vehicle, a negative consumption externality has arisen. Society has suffered because the actual benefit of drinking by some has reduced the benefits possible (from driving) to others.   This reduces the Marginal Social Benefit (MSB) by the extent of the negative effect on others, so that the socially efficient consumption of alcohol is less than the free market level of consumption.

Similarly, cigarette smoking by some individuals in public places will reduce the benefits to others in the form of passive smoking. This may also lead to higher taxes for all taxpayers which the government pay need to pay for increased healthcare in the future.

Diagram for demerit good

The negative consumption externality created by some consumers reduces the private benefit of others. Hence, the Social Marginal Benefit (SMB) which represents all marginal benefits is reduced when demerit goods are consumed, and the socially efficient quantity will be less than the market quantity, which only takes into account the Marginal Private Costs and Benefits.

The welfare loss associated with 'over-consumption' of a demerit good is the excess of Social Marginal Cost above Social Marginal Benefit, which is the quantity Q1 to Q in the above diagram, and the welfare area ABC.


There are several remedies for negative consumption externalities, including imposing indirect taxes, and setting minimum prices, imposing fines for over-consumption, controlling supply through a licensing system.

See also: pollution, carbon emissions and waste disposal

Trends in alcohol consumption

As the table indicates, consumption of alcohol (in the UK) has declined in recent years, with a reduction in the percentage of people regularly consuming alcohol falling from 64% to 57% between 2005 and 2016.

Read more
GDP latest

UK grows by 0.1% in 1st quarter of 2018.

Read more
Customs unions

Costs and benefits of customs unions.

Read more
New materials

Multiple choice papers for Paper Three.

Read more
Brexit update

Article 50

What trading options are available to the UK?

Savings ratio

Savings ratio falls to lowest level on record.

Read more
Tax avoidance

Double Irish - and a Dutch Sandwich more..

The OECD presents its final package for reform of international tax rules..more

Get the Economics Online app