4.1.8.5 Merit and demerit goods Quiz: AQA Economics, Unit 1

The 20 questions

1. Which best describes a merit good?

   • A good that is non-rival and non-excludable, so the market cannot supply it at any price in any economy.
   • A good that the market always over-provides because of negative externalities, so government should always ban its sale.
   • A good that society believes the market under-consumes, so government may encourage or provide it, such as education.
   • A good that the state supplies free to every citizen regardless of its social value or the cost of providing it.

2. Which of the following is a demerit good?

   • Public libraries, which create wide social benefits that the market tends to under-provide in most areas of the country.
   • Fresh fruit and vegetables, which the market consumes at the socially optimal quantity in every case without any intervention.
   • Tobacco, whose consumption imposes external costs on others and is often over-consumed owing to imperfect information about harm.
   • Vaccination, which creates external benefits for others and is often under-consumed in a market without any intervention.

3. Why is the classification of a good as merit or demerit controversial?

   • It is set objectively by the market price, so no judgement about social value is needed in the classification at all.
   • It depends on a value judgement about what is good for people, so different societies may classify the same good differently.
   • It depends only on the price elasticity of demand, which is measured identically by all economists in every market in the case described.
   • It is determined by the number of firms supplying the good, so classification changes only with the level of concentration.

4. Which is the most accurate statement about merit goods and external benefits?

   • Merit goods generate externalities only in production and never in consumption, so their consumption is always efficient.
   • Merit goods never generate externalities, because their benefits are fully captured by the individual who consumes them each time.
   • Merit goods always generate negative externalities, so consumption is always too high without intervention in the market.
   • Merit goods may generate positive externalities in consumption, so the private benefit understates the social benefit of consumption.

5. How can imperfect information lead to under-consumption of a merit good?

   • Information is perfect for all goods, so demand for merit goods always equals the socially optimal level in each market.
   • Consumers always overestimate future benefits, so they demand more than the efficient amount of the good in every market.
   • Producers have full information about the good, so they always supply too little of it to the market in each period.
   • Consumers may underestimate the future benefits of the good, so they demand less of it than would be socially optimal.

6. How can imperfect information lead to over-consumption of a demerit good?

   • Consumers fully understand the harms of demerit goods, so they always choose to consume them at a lower level of demand.
   • Producers hide all information about the good, so consumers consume too little of the demerit good in every case observed.
   • Demerit goods are always consumed by the government on behalf of citizens, so private consumers face no information problem.
   • Consumers may underestimate the long-term health harms, so they consume more of the good than they would with full information.

7. Which policy would encourage consumption of a merit good?

   • A subsidy, which lowers the price paid by consumers and increases consumption towards the socially optimal level of the good.
   • A price ceiling set above equilibrium, which lowers the quantity supplied and so reduces the consumption of the merit good.
   • An indirect tax, which raises the price paid by consumers and so increases consumption of the merit good in the market.
   • A ban on all sales of substitute goods, which increases demand for the merit good by removing alternatives from consumers.

8. Which policy would reduce consumption of a demerit good?

   • Free provision of the good by the state, which removes any cost barrier to consumption for all households in the country.
   • A price floor set below equilibrium, which lowers the cost to consumers and so raises their consumption of the good.
   • An indirect tax on the good, which raises its price and reduces the quantity demanded in the market.
   • A subsidy paid to consumers of the good, which lowers its price and so reduces the quantity that is bought each year.

9. A tax raises the price of a demerit good from £2.00 to £2.40, and quantity demanded falls from 100 to 80 units. What is the most accurate conclusion?

   • Consumption falls by 80 per cent, since the quantity demanded always equals the new quantity remaining after the tax.
   • Demand is unit elastic over this range, since the 20 per cent fall in quantity equals the 20 per cent rise in price.
   • Demand is almost completely inelastic at this price, since consumption falls by only 2.4 per cent after the 20 per cent price rise.
   • Consumption rises by 20 per cent, since a higher price signals to consumers that the good is of higher quality in the market.

10. A merit good has a private benefit of £5 per unit and an external benefit of £3 per unit. What is the social benefit per unit?

    • £15 per unit, being the private benefit multiplied by the external benefit, which measures the total value to society.
    • £5 per unit, because the external benefit is already included in the price paid by consumers in the market.
    • £3 per unit, because the external benefit alone determines the social value of the good in the market.
    • £8 per unit, being the private benefit plus the external benefit.

11. A demerit good has negative externalities and is affected by imperfect information. What outcome is the market likely to produce?

    • Efficient consumption, because imperfect information and externalities always cancel each other out in the market overall.
    • Zero consumption, because demerit goods are never bought by consumers in any competitive market at any price in the case described.
    • Over-consumption relative to the socially optimal level, since both the externality and the information gap push consumption up.
    • Under-consumption, because the negative externality raises the price consumers pay and so reduces their demand for the good.

12. A government provides a merit good free of charge. Which is the most likely drawback?

    • Demand may rise above the level justified by its value, and the cost of provision must be paid from taxes raised from households.
    • Consumers will pay the full market price for the good, so the government earns revenue from providing it in every case.
    • Supply will fall to zero because firms are unable to compete with the government's free provision of the good in any market.
    • Demand will fall because consumers no longer value the good once it is provided free of charge by the state over the period concerned.

13. Which is the best evaluation of using taxes to reduce consumption of demerit goods?

    • Taxes always increase consumption of demerit goods, because consumers respond to higher prices by buying more of the good.
    • Such taxes may be regressive, hitting low-income households harder, so distributional effects must be weighed against the efficiency gains.
    • Taxes always improve welfare for every group, because the revenue raised can be used to reduce consumption of the good.
    • Taxes have no effect on consumption, because demand for demerit goods is perfectly inelastic at every price in the market.

14. A government bans a demerit good entirely. Which is a valid criticism of this policy?

    • A ban reduces the price of the good to zero, so consumers can buy as much of it as they wish at no cost at all.
    • A ban always increases welfare, because removing the demerit good completely from the market is achieved at no cost to anyone.
    • A ban removes consumer choice and may create a black market, so its costs must be weighed against its benefits.
    • A ban has no effect on consumption, because consumers always continue to buy goods that have been prohibited by law.

15. Which of the following is an example of a merit good?

    • Fast food, because its consumption is always under-provided by the market due to very high demand from consumers.
    • Gambling services, because they create positive externalities for all participants and bystanders in every market.
    • Education and health services, which the market may under-consume without government intervention or subsidy.
    • Alcohol, because it is always consumed by people at socially optimal levels in every country of the world.

16. Which feature is most typical of a merit good?

    • Consumption is non-excludable, so no one can be prevented from benefiting from the good without making any payment at all.
    • Consumption is always rival, so each unit can be used by only one consumer at a time in the market for the good.
    • Consumption is believed to yield costs beyond those the individual recognises, so the market over-consumes the good in practice.
    • Consumption is believed to yield benefits beyond those the individual recognises, so the market may under-consume it.

17. Why might a tax on sugary goods be criticised as regressive?

    • High-income households spend a larger share of their income on sugary goods, so the tax falls mainly on wealthy consumers.
    • Low-income households spend a larger share of their income on sugary goods, so the tax takes a bigger proportion of their income.
    • Low-income households do not buy sugary goods at all, so the tax has no effect on their spending in the economy in the case described.
    • The tax raises the incomes of low-income households, because the government spends all of its revenue on their benefits.

18. At quantity 50, the marginal private benefit is £6 and the external benefit is £2 per unit. The market price is £6. Is consumption efficient?

    • Yes, consumption is efficient, since the price of £6 equals the marginal private benefit at that quantity in the market.
    • No, consumption is too high, since the external benefit reduces the value that each unit gives to society as a whole.
    • Yes, consumption is efficient, because external benefits are always fully captured in the price paid by consumers.
    • No, consumption is too low, since the marginal social benefit of £8 exceeds the price of £6 and output should expand.

19. Why might information campaigns be less effective than taxes at reducing consumption of demerit goods?

    • Information campaigns always raise the price of the good, so they have a larger effect on consumption than taxes do in the case described.
    • Information always removes all externalities, so taxes are not needed to correct over-consumption of the good in the market.
    • Information may not change behaviour for consumers who are addicted or have strong preferences, whereas taxes change the price they face.
    • Taxes have no effect on consumption, so information campaigns are always the more effective policy in every case.

20. A voucher worth £100 can be spent on a merit good. Which statement is correct?

    • Vouchers have no effect on the price of the merit good, so consumption cannot change in response to them at all.
    • Vouchers always create a demerit good, because they increase the amount of spending in the economy as a whole in the case described.
    • Recipients gain purchasing power for the good, which can increase consumption while allowing them to choose between providers.
    • Vouchers reduce consumption of the merit good, because recipients must pay the rest of the price from their own income.

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