Merit Goods and Imperfect Information

Steps:

• Identify the problem: consumers underuse the product due to imperfect information, failing to maximize private benefit.
• Recall merit good definition: goods underconsumed because individuals undervalue benefits from lack of information.
• Match to scenario: imperfect information causes underconsumption, aligning with merit good characteristics.
• Eliminate alternatives: demerit goods involve overconsumption, free goods lack scarcity, public goods have non-excludability.

Why C is correct:

• Merit goods are defined as products where imperfect information leads to underconsumption relative to socially optimal levels, as consumers do not fully appreciate private 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 are abundant, like air.
• D: Public goods are non-rivalrous and non-excludable, like national defense.

Final answer: C