Economics · JC 1 · Market Failure and Efficiency · Semester 1

Goods We Under-consume and Over-consume

Exploring goods that society generally wants more of (merit goods like education) or less of (demerit goods like cigarettes) due to imperfect information or societal values.

• MOE Syllabus Outcomes
• MOE: Government and the Economy - Middle School

About This Topic

Students explore merit goods, such as education and healthcare, which individuals under-consume despite societal benefits due to imperfect information and positive externalities. Demerit goods, like cigarettes and sugary drinks, lead to over-consumption as people ignore negative health and social costs. This topic reveals market failures where private decisions diverge from social welfare, using supply and demand analysis to illustrate deadweight losses.

In the MOE JC1 Economics curriculum under Market Failure and Efficiency, students connect these ideas to government roles in Singapore, such as subsidies for education or sin taxes on tobacco. They evaluate policies like public campaigns or regulations that shift consumption toward efficiency, considering real-world data from sources like the Health Promotion Board.

Active learning suits this topic well. Role-playing consumer and policymaker decisions or analyzing local case studies in groups helps students internalize externalities through debate and data handling, turning theoretical diagrams into practical insights they can apply to everyday choices.

Key Questions

1. Why might people not consume enough of things that are good for them, like healthy food or exercise?
2. Why might people consume too much of things that are bad for them, like sugary drinks or gambling?
3. How can the government encourage or discourage the consumption of certain goods?

Learning Objectives

• Analyze the divergence between private consumption choices and social welfare for merit and demerit goods.
• Evaluate the effectiveness of government policies such as subsidies and sin taxes in correcting market failures related to under- and over-consumption.
• Compare the economic rationale for government intervention in markets for goods with positive externalities versus negative externalities.
• Explain how imperfect information contributes to the under-consumption of merit goods.

Before You Start

Introduction to Market Failure

Why: Students need a foundational understanding of why markets sometimes fail to achieve allocative efficiency before exploring specific types of market failure like externalities.

Supply and Demand Analysis

Why: Understanding how supply and demand curves interact to determine equilibrium price and quantity is essential for analyzing the impact of externalities and government interventions.

Key Vocabulary

Merit Good	A good that is under-consumed because individuals do not fully appreciate its benefits, leading to positive externalities and a divergence between private and social benefits.
Demerit Good	A good that is over-consumed because individuals do not fully appreciate its costs, leading to negative externalities and a divergence between private and social costs.
Positive Externality	A benefit that is enjoyed by a third party as a result of an economic transaction, such as the societal benefits of education or vaccination.
Negative Externality	A cost that is suffered by a third party as a result of an economic transaction, such as the health costs associated with smoking or pollution.
Sin Tax	An excise tax imposed on goods deemed harmful to society, such as tobacco, alcohol, or sugary drinks, intended to discourage consumption.

Watch Out for These Misconceptions

Common Misconception

People always consume the socially optimal amount of merit goods if they are available.

What to Teach Instead

Under-consumption stems from imperfect information and positive externalities not captured in prices. Group discussions of personal choices versus societal benefits help students visualize externalities on diagrams, while peer teaching corrects individual biases through shared examples.

Common Misconception

Demerit goods are only harmful to the consumer, with no wider impact.

What to Teach Instead

Negative externalities affect healthcare costs and productivity for society. Role-play activities where groups tally group-wide costs from over-consumption reveal these links, and collaborative diagram shifts show policy corrections more clearly than lectures.

Common Misconception

Government taxes or subsidies always distort markets further.

What to Teach Instead

Well-targeted interventions correct failures by internalizing externalities. Debates in small groups expose students to evidence from Singapore policies, helping them weigh trade-offs and appreciate nuanced economic reasoning over simplistic views.

Active Learning Ideas

Think-Pair-Share: Classifying Goods

Students individually list five everyday goods and label them as merit, demerit, or neutral with reasons. In pairs, they compare lists, discuss externalities, and refine classifications. Pairs share one example with the class for a quick vote and explanation.

20 min·Pairs

Small Group Debate: Policy Interventions

Divide class into groups assigned to argue for or against subsidizing healthy food versus taxing gambling. Groups prepare evidence using diagrams and Singapore examples, then debate in a structured format with rebuttals. Conclude with a class vote on best policy.

40 min·Small Groups

Diagram Stations: Externalities Shift

Set up stations with merit and demerit good scenarios. Groups draw initial and post-policy supply curves, label externalities, and calculate efficiency gains. Rotate stations, adding peer feedback before presenting one diagram to the class.

35 min·Small Groups

Whole Class Simulation: Market Trading

Distribute cards representing merit and demerit goods with hidden externality values. Students trade in a mock market, then reveal externalities and adjust trades. Discuss how information asymmetry led to under- or over-consumption.

30 min·Whole Class

Real-World Connections

• The Singapore government's 'War on Diabetes' campaign, utilizing public awareness initiatives and potential taxes on sugary drinks, aims to reduce the over-consumption of demerit goods.
• Subsidies provided by the Ministry of Education for polytechnic and university courses encourage greater consumption of merit goods, recognizing their long-term societal benefits.
• The Health Promotion Board's 'I Quit' campaign targets smokers, aiming to reduce the consumption of tobacco, a demerit good, by highlighting its negative health consequences.

Assessment Ideas

Discussion Prompt

Pose the question: 'If education provides significant benefits to society beyond the individual, why do some individuals still choose not to pursue higher education?' Guide students to discuss imperfect information, opportunity costs, and perceived benefits.

Quick Check

Present students with a list of goods (e.g., vaccinations, fast food, public parks, gambling). Ask them to classify each as a merit good, demerit good, or neither, and provide a one-sentence justification for each classification based on externalities or information issues.

Exit Ticket

On an exit ticket, ask students to identify one government policy in Singapore aimed at discouraging the consumption of a demerit good and explain how it attempts to correct the market failure.

Frequently Asked Questions

What are examples of merit and demerit goods in Singapore?

Merit goods include education, subsidized by MOE fees, and vaccinations via HealthHub programs, under-consumed due to upfront costs despite long-term benefits. Demerit goods like cigarettes face GST and excise duties, over-consumed ignoring second-hand smoke costs. Students analyze these with local data to see market gaps.

Why do people under-consume healthy food or exercise?

Imperfect information hides long-term benefits, and positive externalities like reduced public healthcare burden are ignored. Immediate gratification from unhealthy options prevails. Diagrams showing marginal social benefit above private benefit clarify this, preparing students for policy discussions on nudges like Healthy 365 app incentives.

How can active learning help teach under and over-consumption of goods?

Activities like trading simulations or policy debates make externalities tangible, as students experience information gaps firsthand. Group analysis of Singapore cases builds critical thinking, while peer feedback refines arguments. This approach boosts retention over passive note-taking, aligning with MOE emphasis on inquiry-based learning.

What government interventions correct consumption of merit and demerit goods?

Subsidies and vouchers shift merit good supply rightward, like SkillsFuture credits for education. Taxes on demerit goods raise prices, reducing demand, as with alcohol duties. Students evaluate effectiveness using elasticity concepts and real data, considering paternalism debates in Singapore's context.