Demerit goods cause overconsumption due to negative externalities

Steps:

• Identify demerit goods as items like tobacco or alcohol with harmful effects not fully recognized by consumers.
• Recognize that in a free market, consumers ignore negative externalities, leading to higher consumption than socially optimal.
• Compare options: A suggests benefits (opposite of harm), B matches overconsumption, C implies underproduction (for merit goods), D describes positive externalities.
• Select B as it directly aligns with the market failure of excess demand for demerit goods.

Why B is correct:

• Demerit goods are overconsumed in the free market because negative externalities (e.g., health costs) are not reflected in price, per economic theory of market failure.

Why the others are wrong:

• A: Demerit goods are harmful, not beneficial, to consumers.
• C: Underproduction applies to merit goods with positive externalities.
• D: External benefits characterize merit goods, not demerit ones.

Final answer: B