Market failure - demerit goods

In Unit 3 outcome 1 merit and demerit goods are studied. Merit goods are technically 'lack of information goods', where consumers do not have all the information necessary to make a decision on consumption, or ignore information that is relevant.

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. Therefore Australian governments are starting the process of banning sunbeds.

The Victorian government are dragging their feet a little, but they should soon join the movement towards the elimination of this particular demerit good.

The costs of the move? 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 Age report on progress in Victoria to ban sunbeds here