Demerit Goods and Hidden Harms

Steps:

• Recall that demerit goods are overconsumed because consumers underestimate their negative effects.
• Evaluate options against the definition: demerit goods involve private benefits but social costs exceeding private costs due to externalities or ignorance.
• Eliminate options that describe merit goods or positive externalities.
• Confirm the option matching underestimation of harm as the core feature.

Why C is correct:

• Demerit goods are defined in economics as products where consumers undervalue the harm (e.g., cigarettes), leading to overconsumption and market failure.

Why the others are wrong:

• A describes merit goods, which generate positive externalities like education.
• B reverses the cost relationship; demerit goods have higher social costs than private costs.
• D fits goods with no externalities, not demerit goods that impose costs on third parties.

Final answer: C