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    I'm struggling to understand the difference when it comes to correcting the market failure from demerit goods and negative externalities.

    The diagrams are both similar (if not the same) and both have an element of over-consumption. Is there a difference when it comes to correcting them? If so, how would I go about it?

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    The are the same to an extent, you can call stuff like cigarettes things which cause a consumption related negative externality a demerit good. However don't get this mixed up with a production based one, for example pollution is a negative externality which isn't a demerit good. Where negative externalities look at everything while demerit goods are just related to consuming something which is bad for your health.
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    (Original post by Dilzo999)
    The are the same to an extent, you can call stuff like cigarettes things which cause a consumption related negative externality a demerit good. However don't get this mixed up with a production based one, for example pollution is a negative externality which isn't a demerit good. Where negative externalities look at everything while demerit goods are just related to consuming something which is bad for your health.
    So if it needed correcting, would I try to shift the supply curve to the left in both cases?
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    Yes taxes e.g. one way to fix the negative externality, can cause a shift left of supply which reduces output to the socially optimal. When it comes to exams always think of why the externality has occurred, is it something to do with the businesses? Or something to do with products/consumers. Always when it's a negative externality it incurs external costs which is why we need to reduce output of those said externalities.
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    (Original post by NedStark)
    I'm struggling to understand the difference when it comes to correcting the market failure from demerit goods and negative externalities.

    The diagrams are both similar (if not the same) and both have an element of over-consumption. Is there a difference when it comes to correcting them? If so, how would I go about it?

    Thanks
    Demerit goods are those that are worse for consumers than they realise because of the negative externalities they produce.

    So demerit good: cigarette
    Negative externality: smoke it emits to others meaning marginal social cost is greater than marginal private cost (marginal social cost = marginal private cost + marginal external cost)


    The solution is to shift demand for the demerit good to the left, thereby eliminating the negative externality.


    Hope that clears things up
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    (Original post by dslc)
    Demerit goods are those that are worse for consumers than they realise because of the negative externalities they produce.

    So demerit good: cigarette
    Negative externality: smoke it emits to others meaning marginal social cost is greater than marginal private cost (marginal social cost = marginal private cost + marginal external cost)

    The solution is to shift demand for the demerit good to the left, thereby eliminating the negative externality.

    Hope that clears things up
    If the aim is to reduce demand for demerit goods, then how come we use indirect taxes on cigarettes etc. when the effect of that is shifting supply to the left?

    Does reducing supply eliminate the externality too?
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    Taxes is just one way of shifting/closing the externality because taxes cause prices to rise and deter people from buying these demerit goods. However a nice evaluative point you can say is that they are habit forming goods therefore they are price inelastic so people will still keep buying them no matter what their price so it isn't that effective. Another way could be closing the information gap, getting people to know the dangers of smoking/dangers of consuming said demerit good which will reduce demand.
 
 
 
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