Merit Goods and Underconsumption Due to Information Failure

Steps:

• Identify underconsumption relative to private benefit from imperfect information.
• Recall merit goods feature underuse because consumers undervalue benefits due to lack of knowledge.
• Contrast with other categories: demerit goods overconsumed, free goods scarce-free, public goods shareable without rivalry.
• Classify as merit good, as it matches information-driven underconsumption.

Why C is correct:

• Merit goods are underconsumed below socially optimal levels because imperfect information leads consumers to undervalue private and external benefits.

Why the others are wrong:

• A: Demerit goods are overconsumed due to negative externalities, like alcohol.
• B: Free goods have zero opportunity cost and no scarcity, unrelated to information.
• D: Public goods are non-excludable and non-rivalrous, like national defense.

Final answer: C