Demerit goods, such as tobacco, are similarly lack of information goods. Where they are present in the market an inefficient allocation of resources will occur as consumers maximise perceived private benefits weighted against private costs.
They consume to the point where Marginal Private Benefit equals Marginal Private Cost. With demerit goods Marginal Private Cost understates the true costs of consumption and so the market fails.
One way to correct this is through price. A tax will raise private costs and reduce consumption. But what if the harm done by the good is so great that the optimal level of consumption is zero? Then regulation must be used to ban the good or service.
In Australia it has long been recognised that ultraviolet radiation causes skin cancer. It appears that sunbeds cause a much greater amount of harm than natural sunlight, but consumers do not consider the full information on harmful effects and continue to use sunbeds. Therefore Australian governments are starting the process of banning sunbeds.
As with all policy choices there are costs of acting. There is no guarantee that it will work for a while as second hand sun beds are traded and who knows if there will be a trade in illegal sunbeds from states that do not act? Of course zero may not be the optimal level of consumption of sunbeds, for example some people suffer from a lack of vitamin D and need them to correct this. All regulation is a guess and can be a sledgehammer to crack a walnut.
The aim of producers are maximasing the total producer surplus and to aim profit maximasation (MR=MC). Yet, due to imperfect information, negative externalities always occurs. Take the market of sunbeds in Australia as an example. There is a divergence of s marginal siocal cost and marginal private cost. Marginal social cost is higher than the marginal private cost. Market cannot allocate resouces efficently. Siocially optimal output will be higher than private optimal output. Therefore, overproduction deadweight loss occurs.
ReplyDeleteYet, should the government bans sunbeds? If the transaction cost were zero, the answer would be no. It does not pay to completely climinate the consquences of sunbathing. People should be allowed to buy sunbeds until the net marginal social benefit gaining from sunbes is zero. Thus, such a ban will definitely lead to misallocation of resoucres.
The social costs involved in the production and consumption of demerits goods are so hard to measure that banning them is just the easiesy way out ine ensuring the costs are not taken on by third parties. How wouold a government figure out how much the negative externatilities of sunbeds are costing the third parties and how would they discover the correct price in which the good should be sold at to cover these costs, the information required to discover these costs are so extensive that the banning the good would probably be the bast way to solve the problem.
ReplyDeleteI can understand why a ban may seem like a good idea and, in terms of simplicity, it would be by far the best. However, the banning of demerit goods may be ineffective as we can see from the outcomes of similar situations. Psychologically, we wish to feel in control of our own decisions and therefore the disallowing of the use of a product, particularly if we were inclined towards the use of it before hone, only makes it more appealing. Surely it would therefore be more productive to find ways of shifting the supply and demand curves to the left and so give people a different cognitive approach to the situation, whereby they feel they are choosing themselves not to use demerit goods due to a lack of funds or simply a loss of interest in it.
ReplyDeleteFor example, we all know the legal age for smoking is now 18, however we all know that the number of people who stick to that limit is very few. I believe that part of the reason for this, aside from the effect of smoking among peer groups, is that the government has insisted on hammering the dangers or smoking into us to such an extent that it makes people more and more defiant and curious as to what the big deal is all about.
I'm not saying that the banning of demerit goods is always a bad idea, however in this case I believe there would be better ways around it, particularly due to the need to keep some sunbeds active for the sake of those needing them for medical reasons.
I believe that although they may be considered to be a merit good, many people have more recently been exposed to more information and therefore many are aware that they are harmful to their health. Their tastes and preferences may cause them to continue to use them. I agree with Alex, although banning them looks to be the obvious solution on the surface it may only become more appealing to some in this case. Other methods such as increasing costs for producers making the product more expensive to consume may be more effective in reducing demand as people realise that they can not afford to continue to consume the product. Saskia Linn
ReplyDeleteA ban is an extremely simplistic solution to what is a problem which is extremely subjective problem. Ban has its positive sides, firstly, it is straight forward and quite easy to enforce, but the banning on the product, may even make its more favorable and fashionable, affecting people’s tastes and preferences and possibly increasing demand for the demerit good. Meaning that people will find a way of getting past the ban. A more productive method, such as harsher taxing of the good, will hit people harder and, in my opinion, work better. But personally, I feel that the distribution of information is the best method. This allows people to make more educated choices and over-time will decrease demand and , in a perfect world, may even change the idea that demerit goods are fashionable. Tof Odusolu
ReplyDelete