What is the difference between negative externalities and demerit goods?

What is the difference between negative externalities and demerit goods?

• & positive externalities and merit goods? Thank you

• Answer:

  The difference concerns effects on the individual consuming and effects on the wider society. A demerit good (crack, say) has a negative effect on the consumer, but his consumption does not have a direct negative effect on society, such as would the consumption of a good with negative externalities like listening to loud music in an apartment building. (This is ignoring the longer-term negative societal effects of crack, like crime etc.) The problem with demerit goods is people consume more of them than is good for them (either because they do not know the harm or are operating using constrained rationality due to addiction). The problem with negative externality goods is people consume too much of them that is good for everyone else as they do not have to deal with all the effects themselves. For merit and positive externality goods, just reverse the above.