Demerit goods cause overconsumption from underestimated harms

Steps:

• Identify information failure: consumers lack complete knowledge of a good's full costs or benefits.
• Recognize demerit goods: items like alcohol or junk food with negative effects that users undervalue.
• Link to overconsumption: incomplete info leads to higher demand than socially optimal.
• Rule out alternatives: only demerit goods tie directly to excess use via info gaps.

Why A is correct:

• Demerit goods are overconsumed because information failure causes consumers to underestimate negative externalities, like health risks, per economic theory on market failure.

Why the others are wrong:

• B. Inferior goods relate to income effects, where consumption falls with rising income; unrelated to information.
• C. Merit goods are underconsumed due to undervalued benefits from information failure.
• D. Public goods face underconsumption from free-rider issues, not information problems.

Final answer: A