A merit good tends to be under-consumed because consumers do not understand its benefits. A demerit good tends to be over-consumed because consumers do not understand its costs. The difference is whether imperfect information leads people to consume too little or too much.

Specification coverage: Cambridge International AS & A Level Economics, AS Level topic 1.6, Classification of goods and services: 1.6.3 covers merit goods and under-consumption caused by imperfect information; 1.6.4 covers demerit goods and over-consumption caused by imperfect information.

Why does this happen?

Imperfect information means people lack relevant facts or do not understand them fully when deciding what to buy or use.

Take education as an example of a merit good. A student who underestimates how education could improve their opportunities may choose less of it than they would if they understood those benefits. The result is under-consumption.

Cigarettes provide a contrasting example of a demerit good. Someone who underestimates the long-term health risks of smoking may buy more cigarettes than they would with better information. The result is over-consumption. In both examples, the explanation depends on what the consumer misunderstands, not just on whether the product seems desirable.

Governments may try to address these problems by providing information. They may also support access to merit goods or discourage consumption of demerit goods. For example, a tax can make cigarettes more expensive, reducing the incentive to buy them; an information campaign instead aims to improve understanding of the risks. These measures work in different ways, so do not confuse a price change with improved information.

Exam mistake to avoid: defining a merit good merely as ‘good for you’ or a demerit good as ‘bad for you’. State whether consumption is too low or too high, then link that outcome to imperfect information.