What is the difference between negative externalities and demerit goods?

Why are positive externalities "market failure" And also why are merit and demerit goods, under and over consumed, respectively?

• I understand that negative externalities are market failure since they have costs upon third parties therefore the full social cost isn't reflected in market price however i ...show more

• Answer:

  The assumption is that if there is a positive externality then the market will create less of that good. For example, say you live in a house where no one mows their lawn and their front yards look ugly and the housing prices go down. If you take care of your yard and mow your lawn, your house will go up in value, but so will the houses of your lazy neighbors. They become free-riders. The idea is that if some neighbors do mow their lawns then even those who do not mow their lawns still have pretty decent housing values, and dont need to mow the lawn themselves. If, on the other hand the value of a house was judged only on its own lawn, then everyone would have more incentive to mow their lawns. Lazy people would no longer be able to benefit from their neighbors' hard work. merit goods have positive externalities and demerit goods have negative externalities. What this means is that merit goods actually create more value than is paid for them because of all the positive externalities. The opposite is true of demerit goods. They actually cost society more than people think because of all the negative externalities.